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Report of the Comptroller and Auditor General of India on
Report of the
Comptroller and Auditor General of India
on
Production and Sale of Iron Ore
by NMDC Limited
for the year ended March 2012
Union Government
Ministry of Steel
Report No. 20 of 2012-13
(Performance Audit)
Report No. 20 of 2012-13
Table of Contents
Sl. No.
Contents
Page No.
Preface
iii
Executive Summary
v to viii
1
Introduction
1
2
Production of Iron Ore
5
3
Evacuation Facilities
23
4
Sale of Iron Ore
27
5
Governance Issues
41
6
Conclusion and Recommendations
45
i
Report No. 20 of 2012-13
PREFACE
This Report of the Comptroller and Auditor General of India
contains the results of the Performance Audit of ‘Production
and Sale of Iron Ore’ by NMDC Limited. The Audit covered the
period from 2005-2012.
The Report results from scrutiny of files and documents
pertaining to NMDC Limited.
Audit wishes to acknowledge the cooperation received from
NMDC Limited at each stage of the audit process.
iii
Report No. 20 of 2012-13
Executive Summary
1. Starting in 1958 with a production capacity of 2 million tonnes per annum, NMDC
Limited, a mining Company, has achieved a production capacity of 32 million tonnes per
annum (MTPA) as of 2011-12. The Company has been making profit over the last 21 years
and earned a profit before tax of ` 10,760 crore on an income of ` 13,278 crore in 2011-12.
The Company undertakes iron ore mining operations mainly through its four open cast mines
at Kirandul and Bacheli (two mines each) in the State of Chhattisgarh and one at Donimalai
in the State of Karnataka.
2. We conducted performance audit of Company’s activities relating to production,
evacuation and sale of iron ore covering the period from 2005-06 to 2009-10. This was
updated with statistics for 2010-12. During audit, we reviewed the activities of all the mines,
i.e., five operational mines and two new mines (Kumaraswamy Deposit at Donimalai,
Karnataka and Deposit 11B at Bailadila, Chhattisgarh) under development. We also reviewed
sales made to selected customers, which represented 94 per cent of the total sales of the
Company. Apart from this, we also reviewed price fixation mechanism and minutes of 63
Board meetings held between April 2005 and March 2012. Significant audit findings are
stated below.
Production of iron ore
3. The Company’s Corporate Plan last formulated in May 2001 covered nine years from
2001-02 to 2009-10. The plan envisaged to increase production capability to 25 MT by
2006-07 and around 30 to 35 MT by 2011-12 and secure the Company’s share in iron ore
production at 20 per cent of the Country’s production. Audit noticed that:
¾ The production capacity stood at 32 MTPA in 2010-11 which was in line with the
Corporate Plan target.
¾ The Company’s share in iron ore production of the Country, however slipped from 14 per
cent in 2005-06 to 11 per cent in 2009-10 but increased to 16 per cent in 2011-12 owing
to ban on private mining in Karnataka. The decrease in market share was due to increase
in production of low grade iron ore by other producers.
¾ The Company attained capacity utilization ranging from 74 per cent to 105 per cent but
did not meet the annual production targets in four of the seven years except 2007-08,
2010-11 and 2011-12. The shortfall in the Company’s production was mainly on account
of evacuation constraints.
4. There were total iron ore reserves of 1,565 million tonnes (MT) with the Company out of
total proven reserves of 28,526 MT in the Country. The Company needs to formulate a
strategy for acquisition of new mines so as to maintain operations on a longer horizon.
v
Report No. 20 of 2012-13
Capacity expansion
5. The available installed capacity increased from 24.22 MTPA in 2005-06 to 32 MTPA in
2007-08 due to introduction of third shift in Bailadila and Donimalai sectors and addition of
fourth line in screening plant at Donimalai sector.
6. NMDC decided to develop Kumaraswamy Deposit and 11B Deposit in 1997 and 2003
respectively. These two projects, expected to add capacity of 14 MTPA, were still under
implementation in 2012.
¾ Though conceived in 1997, the work in Kumaraswamy Project in Bellary district of
Karnataka could effectively start only after February 2009 due to delays in getting
statutory clearances.
¾ The Kumaraswamy Project is still in progress due to delays in awarding contracts for
development.
¾ Delays in award of contracts and implementation were noticed in 11B Deposit Project in
Dantewada district of Chhattisgarh. Other constraints such as difficulties in mobilization
of resources and manpower due to Maoist activities were noted in Audit.
¾ As a result of delays and also change in scope of the work, the initial project cost of ` 592
crore for both the projects has gone up to ` 1,506 crore..
¾ Some of the delays were controllable and point towards the deficiencies in the project
management by the Company. There were also delays due to external constraints. The
projects are expected to be completed by January 2013 (Kumaraswamy mine) and
November 2012 (Deposit 11B).
Evacuation Facilities
7. Evacuation refers to transporting of iron ore from mines to buyers’ sites/ ports. NMDC
had an evacuation capacity of 30 MTPA as against the production capacity of 32 MTPA. The
shortfall was at Bailadila sector in Chhattisgarh.
¾ Though the evacuation capacity turned inadequate in 2007-08, the options available to
enhance the capacity were not pursued vigorously by NMDC.
¾ The Board approved laying of a slurry pipeline (capacity of 8 MTPA) from Kirandul to
Visakhapatnam in July 2008 but only ‘due diligence’ could be completed by March 2012.
¾ Another option of doubling of Kirandul – Jagadalpur railway line to enhance the capacity
by 3 MTPA was taken up in JCM with Railways only in February 2010 and not pursued
vigorously thereafter.
8. In essence, inadequate evacuation facilities at Bailadila sector proved to be significant
limiting factor in enhancing production.
vi
Report No. 20 of 2012-13
Sale of Iron ore
9. The Company enters into Long Term Agreements (LTAs) for a period of five years with
customers for sale of iron ore in the domestic as well as export market. Such LTAs provide
for minimum and maximum quantities to be supplied by the Company. During 2011-12, it
contributed 16 per cent of Country’s iron ore production and met 23 per cent of the domestic
demand. 84 per cent of Company’s domestic sales were through LTAs. Only 3 per cent were
through domestic spot sales.
10. Till 2010-11, the export prices of the Company formed the basis for fixing domestic
prices. The Company entered into long term agreements with Japanese Steel Mills (JSMs) for
supply of iron ore. The prices negotiated by the Company were in line with those paid by
JSMs to Australian and Brazilian suppliers. However, due to infirmities in the domestic
contracts and inadequate action by the Company to revise the prices in view of market trends,
the Company suffered a loss of ` 745.94 crore during 2007-10 on domestic sales.
11. By extending unwarranted reduction in price, the Company passed on benefit of `
600.83 crore to the customers during 2010-11. Further, by not increasing the prices by full
percentage in line with increase in export prices, it suffered a loss of ` 227.34 crore during
the same period.
12. During 2011-12, the Company followed ‘Net Back’ method and ‘Domestic Price Parity’
method to fix the domestic prices of iron ore. The net back price is fixed after deducting
expenses such as export railway freight, port charges, royalty and export duty from the export
price. The net back method suppresses the domestic price due to higher export related
expenses. The domestic price parity method which is based on OMC prices is an imperfect
method of fixing prices as the individual ex-mine prices vary based on the quality of ore and
transport distance.
13. Considering that the end-product (steel) prices are market driven, it is desirable that a
mechanism may be established which would address (i) optimum price realization for
NMDC’s ore, (ii) assured supply to domestic steel producers, and (iii) predictability of price.
Governance Issues
14. The Board of Directors is expected to monitor the key areas of operations and direct
appropriate remedial action wherever required. As brought out in the Report, delays in
completion of capacity expansion projects, inadequacy of evacuation facilities and infirmities
in fixation of prices were three high risk concerns.
15. Though the Board held 63 meetings between April 2005 and March 2012, the progress
of implementation of capacity expansion projects was not discussed until January 2010. The
issue of inadequate evacuation capacity was discussed by the Board only in July 2008 but
was not followed up later. It is only in March 2010, the Board constituted a sub-committee of
Directors to monitor the progress of expansion schemes.
vii
Report No. 20 of 2012-13
16. In respect of price revision in case of domestic LTAs, the Board did not provide any
guidance regarding clarity in terms relating to revision of prices, i.e, when exactly to effect
the revision in prices and by how much.
17. Thus, the performance of the Board fell short of the expected standards of governance.
The oversight of the Ministry was deficient as it did not set appropriate targets in the Results
Framework Document for the projects under implementation.
Conclusion
18. The Corporate Plan aimed at securing the market leadership for the Company in its
mining operations. Though the Company catered to about 23 per cent of domestic demand of
ore in 2011-12, its new capacity expansion projects did not progress as planned, due to
deficiencies in the project management by the Company and external constraints. Similarly,
the mismatch of its evacuation facilities vis-à-vis production capacity in Bailadila sector
proved to be a bottleneck in realization of its optimum production capacity.
19. Due to infirmities in price fixation, the Company suffered a loss of ` 1574.11 crore
during 2007-11.
20. The ‘net back method’ followed for price fixation in the domestic market results in the
domestic buyers being charged lower rates than the overseas buyers. Considering that the
end-product (steel) prices are market driven, we are of the opinion that NMDC should
establish a new pricing mechanism whereby the price reflects the market scenario.
Recommendations
21. Audit recommends the following measures to help the Company to strengthen its
operations:
™
The Company needs to formulate a strategy spelling out its plans for acquisition of new
mines/ reserves;
™
The Company needs to enhance its project management capability by focusing on project
planning, implementation and monitoring. In this regard, the Company needs to specify
the timeframes and milestones for all project activities and ensure their strict adherence
through continuous monitoring and requisite remedial action;
™
The Board should regularly monitor the progress of laying of slurry pipeline;
™
The issues relating to doubling of K-K line should be taken up at the Railway Ministry
level and pursued so as to expedite its completion;
™
The domestic price fixation mechanism for iron ore may be established which would
address these issues: (i) optimum price realization for NMDC’s ore, (ii) assured supply to
domestic steel producers, and (iii) predictability of price.
™
The Board of Directors of the Company need to review the progress of ongoing projects
periodically and suggest remedial action wherever warranted so that the projects are
completed as envisaged.
viii
Report No. 20 of 2012-13
Chapter – 1
Introduction
Industry Profile
1.1
The production of iron ore in India is through captive mines (owned and operated by
individual steel plants both in public and private sectors mainly for their own use) as well as
non-captive mines (for domestic consumption and exports). The total production of iron ore
in the Country during 2010-11 was 208.11 million tonnes (MT). In the non-captive segment,
major companies in the public sector are NMDC Limited (Production: 25.16 MT), Orissa
Mining Corporation (Production: 5.34 MT) and Mysore Minerals Limited (Production
capacity: 6.14 MT). With production of 25.16 MT, NMDC Limited (the Company)
contributed around 12 per cent of the total iron ore production in India in 2010-11. During
2011-12, the Company produced 27.26 MT representing around 16 per cent of the total iron
ore production of the Country which stood at 169.66
MT. NMDC catered to 21 per cent of domestic iron NMDC, a major player with a
capacity of 32 MTPA, produces high
ore demand in 2010-11 and 23 per cent in 2011-12.
1.2
India is one of the leading producers of iron
ore in the world and stands fourth in the list of
world iron ore producers. Out of a total estimated
iron ore production of 2,730 MT in the world in
2011, India produced 169.66 MT which represents 6
per cent of total world production. Subsequent to ban
on mining operations in Bellary, Tumkur and
Chitradurga districts of Karnataka in July/ August
2011 by the Hon’ble Supreme Court, the production
of iron ore in Karnataka came down from 37.88 MT
in 2010-11 to 13.27 MT in 2011-12. As of April
2012, the mining of iron ore in Karnataka was
permitted only by NMDC.
quality iron ore through its five
mines.
***
NMDC mainly caters to domestic
demand. Though NMDC’s share in
the Country’s total production was
16 per cent in 2011-12, it fulfilled 23
per cent of domestic iron ore
demand.
***
NMDC earned a profit before tax of `
10,760 crore on an income of `
13,278 crore in 2011-12.
Company Profile
1.3
NMDC was incorporated in November 1958 with the main objective of exploring and
exploiting the mineral resources in the Country. The Company started its operations with a
production capacity of 2 MT of iron ore and has now grown up to a capacity of 32 million
tonnes per annum (MTPA) of Run of Mine1. The Company has been in profits from 1989-90
onwards. In 2011-12, it earned a profit (before tax) of ` 10,759.70 crore on an income of
` 13,278.38 crore. Production and sale of iron ore is the main activity of the Company
constituting about 99 per cent (` 11,167.56 crore) of the turnover during 2011-12 while about
1
Run of Mine is the ore extracted after segregation of waste. It is further crushed and screened to obtain
saleable products viz., Lump Ore, Direct Reduction Calibrated Lump Ore, Fines etc.
1
Report No. 20 of 2012-13
one per cent (` 101.17 crore) was through sale of diamonds and sponge iron. The Company
was granted Navratna status in 2008.
1.4
The Company undertakes iron ore mining operations mainly through five open cast
mines located at Kirandul and Bacheli (two mines each) in Dantewada district in
Chhattisgarh and one at Donimalai in the district of Bellary in Karnataka with an installed
capacity of 12, 13 and 7 MTPA respectively. The Company produces various sizes of
saleable iron ore products2. The Iron (Fe) content in the iron ore in all these mines generally
varies between 64 and 67 per cent. As of March 2012, the customer base of the Company
consisted of 27 steel making customers, 65 sponge iron customers and six long term foreign
customers The Company sells its ore mainly through Long Term Agreements (LTAs) with
domestic and international buyers. A
small quantity (about five per cent) is
also sold through domestic and
international spot market.
Fig 1: Excavating iron ore from open cut mines
1.5
Iron ore is mined by drilling
and blasting after removal of the
overburden, i.e., top soil. The ore is
loaded
into
dumpers
through
excavators and transported to a
stationary crushing plant. The crushed
ore is screened into different sizes in
the screening plant and is carried
through conveyor belt to the
respective stock yards. Thereafter, the
ore is transported through rail, slurry
pipeline and by road to the designated
places of customers. Exports are made
through MMTC Limited, a canalizing
agency, from Visakhapatnam and
Chennai ports.
Organizational Set Up
1.6
The Company is headed by the Chairman-cum-Managing Director (CMD) who is
assisted by five Functional Directors for Production, Technical, Commercial, Finance and
Personnel. There were two Government of India Nominee Directors and six to eight
2
2
Iron ore fines (size less than 6 mm) are created as a result of mining, crushing and processing the larger
pieces of ore. The iron ore fines have first to be processed into what is called sinter, otherwise it will
effectively smother the air flow in the blast furnace. Iron ore Lump (size 10 mm to 40 mm) is preferred as
when it is fed into a blast furnace for steel making, its particle size allows oxygen or air to circulate around
the raw materials and melt them efficiently. This is the reason, Lump ore commands more price than the
Fines. Direct Reduction Calibrated Lump Ore (size 10 mm – 40 mm) is a high quality Lump Ore, ordinarily
priced at a premium over Lump Ore, which is taken out from the Crusher after the first screening is
completed wherein the contaminants such as Alumina and Silica are removed from the iron ore feed.
Report No. 20 of 2012-13
independent Directors on the Board of the Company. The mines are headed by Executive
Directors/ General Managers who report to Director (Production)/ Director (Commercial) for
day to day operations.
Scope of Audit
1.7
The Performance Audit covers the activities of the Company from 2005-06 to
2011-12. Detailed data relating to Production, Evacuation and Sale of iron ore for the years
2005-06 to 2009-10 were examined and analyzed in Audit.
1.8
All the mines of the Company, i.e., four mines
in Chhattisgarh (two mines in Kirandul and two mines
in Bacheli) and one mine in Karnataka (Donimalai)
along with the Regional/ Liaison offices at Vizag and
Chennai and Corporate Office at Hyderabad were
covered in audit. In addition, implementation of
development of two new mines (Kumaraswamy
Deposit at Donimalai, Karnataka and Deposit 11B at
Bailadila, Chhattisgarh) was also reviewed.
1.9
Out of a total of 27 steel making customers, 19
customers who had placed sale orders of ` 5 crore and
above on the Company were selected for the review.
In addition, 27 sponge iron customers were selected
randomly. We also reviewed exports made to all the
six long term customers. The total value of sales made
to these customers selected in Audit was
` 25,700.08 crore representing 94 per cent of the total
sales during 2005-10. In addition to this, we also
reviewed price fixation mechanism and minutes of 63
Board meetings held between April 2005 and March
2012.
Performance Audit of NMDC focuses
on four areas –
(a) production including capacity
expansion
of
iron
ore,
(b) evacuation facilities, (c) sales,
and (d) monitoring of high risk areas
by Board of Directors.
***
Audit sample included all five
operational mines, two mines under
development and 52 (out of 118)
customers representing 94 per cent
sales. In addition, price fixation
mechanism and minutes of 63 Board
meetings held between April 2005
and March 2012 were also reviewed.
***
The final chapter provides a
summary of Audit recommendations
for
further
improvement
in
Company’s performance.
1.10 The Entry Conference was held in May 2010. Audit examined the relevant records
based on which preliminary observations were issued to the Management and the replies of
the Management wherever received, were considered while drawing audit conclusions which
have been discussed in the subsequent chapters. An Exit Conference was held in September
2010 with the Management to discuss the audit findings with the Management and the report
was finalized and issued to the Ministry of Steel, Government of India in February 2011. The
response of the Ministry of Steel was received in May 2011.
1.11
While the report was being finalized, new facts relating to Karnataka mines came
into light and required fresh examination in Audit. The review was redrafted and again issued
to the Management. The Management’s views were taken on the audit observations post
Lokayukta Report. Management furnished its views in January 2012. The report was updated
3
Report No. 20 of 2012-13
to include the issues up to 2011-12 and was re-issued to the Ministry in July 2012.
Meanwhile, the updated report was discussed with the Management in another exit
conference held in July 2012. The response of the Ministry to the updated report was received
on 23 July 2012 and has been appropriately incorporated while finalizing this report.
Audit Objectives
1.12
¾
¾
¾
¾
¾
The main objectives of the Performance Audit were to assess whether the:
Production was in line with the installed capacity;
Capacity expansion projects were executed within envisaged costs and timeframes;
Evacuation facilities were commensurate with the installed production capacity;
Company’s price fixation methodology ensured optimum revenue from sales; and
Company effectively monitored the high risk areas of operations such as project
development.
Audit Criteria
1.13
¾
¾
¾
¾
¾
¾
Audit was carried out using the following criteria:
Corporate Plan, Installed Capacity and Annual Plans;
Board Agenda and Minutes;
Expansion schemes envisaged;
Ganeshan Committee Report;
International spot prices of iron ore; and
Sale contracts with customers.
Acknowledgement
1.14 Audit acknowledges the cooperation and assistance extended by the Management at
various stages of Performance Audit.
Audit findings
1.15 The Performance Audit revealed certain areas and issues which need to be addressed
by the Management to optimize the results of operations. The audit findings are discussed in
four chapters as detailed below.
4
Chapter 2:
highlights shortfall in production and delays in implementation of the new
projects impacting the production plans of the Company;
Chapter 3:
flags the bottlenecks in the Evacuation facilities for iron ore;
Chapter 4:
discusses the Pricing and Sales issues; and
Chapter 5:
brings out inadequacies in the Governance.
Chapter 6:
gives the audit conclusions and recommendations.
Report No. 20 of 2012-13
Chapter – 2
Production of Iron Ore
This chapter highlights the shortfall in production in the existing mines and delays in
development of new mines impacting adversely the production plans of the Company.
Corporate Plan Targets and Achievement
2.1
The Company formulated (May 2001) its Corporate Plan covering a period of nine
years from 2001-02 to 2009-10. The Corporate Plan for the subsequent years has not been
prepared so far (March 2012).
2.2
The Corporate Plan envisaged:
To increase the production capability to 25
MTPA by 2006-07 and around 30 to 35 MTPA
by 2011-12; and
NMDC had a production capacity
of 32 MTPA by 2011-12 as against
28 MTPA envisaged in the
Corporate Plan.
***
To maintain its share at 20 per cent in the
Country’s iron ore production. The share of the
Company in iron ore production of the Country,
in fact, slipped from 14 per cent in 2005-06 to 11
per cent in 2009-10. The decline in Company’s
share was due to increase in low grade ore
production for export by the private operators. Its
share, however, increased to 16 per cent in 201112 owing to ban on private mining in Karnataka.
NMDC catered to 23 per cent of
domestic demand in 2011-12 by
selling substantial ore in the
domestic market.
***
NMDC possesses about 5.5 per
cent of Country’s reserves. It needs
to formulate a strategy for
acquisition of new resources/
mines.
During 2009-10 and 2010-11 the actual production of
iron ore by the Company declined from 28.52 MT (2008-09) to 23.80 MT (2009-10) and
25.16 MT (2010-11). The decline in production was mainly due to the breakdown of slurry
pipeline of ESSAR which created evacuation constraints as discussed in Chapter 3. However,
excluding exports, the Company’s share in domestic ore supply was about 23 per cent in
2011-12.
2.3
We observed that the Company had achieved a production capacity of 32 MTPA by
2007-08 and had proven iron ore reserves of 1,565 MT at 64% Fe (including the reserves of
11B and Kumaraswamy Deposits which are under development) as on 31 March 2011 out of
a total of 28,526 MT3 proven iron ore reserves in the Country. The Company needs to work
out its strategy on reserve accretion and acquisition of new mining areas in India and abroad
to enhance its production while maintaining operations on a longer term.
3
This is as of 1 April 2010 as given in Working Group Report on Steel for the 12th Five Year Plan.
5
2005-06
2006-07
2007-08
2008-09
Annnual Production
n Targets
2009-10
0
Actual Produ
uction
2010-11
2011
1-12
Report No. 20 of 2012-13
Table 1: Table indicating the installed capacity, annual production targets and actual
production by the Company during the last seven years ending March 2012
(in MT)
Details
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
Installed capacity – virtual*
Annual Production Targets 4
Actual Production
Percentage
of
actual
production to
annual
production targets
Percentage
of
actual
production to virtual installed
capacity
24.22
24.45
22.92
94
25.00
26.90
26.23
98
32.00
29.60
29.82
101
32.00
33.12
28.52
86
32.00
29.90
23.80
80
32.00
24.60
25.16
102
32.00
24.00
27.26
114
95
105
93
89
74
79
85
*
2011-12
Though the installed capacity was officially revised by the Company only in 2009-10, audit has added the
additional capacity of 3 MT from the year 2005-06 to arrive at the virtual installed capacity because
the Company had introduced the third shift and fourth line at Donimalai in 2005-06 itself.
2.8
As would be seen from the above, despite the fact that production targets were
invariably below the installed capacity, even then, in four out of the seven years ended March
2012, the Company could not achieve its own
targets. In 2009-10, there was damage to the slurry
decided
to
develop
pipeline of ESSAR Steel Limited which was NMDC
Kumaraswamy
Deposit
in
1997.
This
unforeseen. .
Shortfall in Capacity Expansion
2.9
The Company proposed (January 1997) the
development of Kumaraswamy Project as a
replacement to Donimalai mine. In January 2003,
the Company further proposed to develop Deposit
11B in Chhattisgarh in order to meet the projected
shortfall in demand and supply of iron ore at 7.80
MT by 2006-07 in Bailadila sector. These
projects, expected to add capacity of 14 MTPA,
are still under implementation indicating
enormous
delays
and
deficient
project
management. The issues relating to development
of these mines are discussed in the subsequent
paragraphs.
4
project, expected to add capacity of 7
MTPA, was still under implementation as
of March 2012.
***
The
implementation
of
the
Kumaraswamy Project could take off
only after February 2009 mainly due to
delays in getting statutory clearances.
***
The initial project cost of 296.03 crore
has gone up to 898.55 crore due to
revision
of
capacity
from
3 MTPA to 7 MTPA & creation of
additional facilities ( 320.00 crore) and
general price rise ( 282.52 crore).
As fixed in the Annual Corporate Meetings held by the CMD with functional directors and heads of
projects.
7
Report No. 20 of 2012-13
Kumaraswamy Deposit
2.10 The Company’s Donimalai Deposit in Karnataka has a capacity of 7 MTPA which
were to get depleted by 2012-13. Therefore, the Board accorded (January 1997) approval to
develop Kumaraswamy Deposit situated close to Donimalai- both in Bellary district in
Karnataka- as a replacement to Donimalai Iron Ore Mine. The Kumaraswamy mine was to
have an initial production capacity of 3 MTPA which was to be stepped up to 7 MTPA when
reserves at Donimalai mine get exhausted. It was proposed to develop Kumaraswamy
Deposit by sharing the facilities of Donimalai mine such as, screening plant, down below
facilities and township.
2.11 Kumaraswamy Deposit was slated to be completed by October 2009 as per the
consultancy contract awarded in July 2006 to MECON. The project is not yet complete
(March 2012) and is scheduled for completion by January 2013. Delay in completion of
Kumaraswamy project and change in scope of the project resulted in revision of project cost
from ` 296.03 crore (April 2003) to ` 898.55 crore (December 2010). The reasons as to why
the project could not be completed in time were analyzed in audit in detail. The findings are
narrated below.
Delays in getting statutory clearances
2.12 Though the Board approved the project in January 1997, the Company could apply
for the firm forest clearance in July 19995 only. The forest clearance involved diversion of
341.20 ha of forest land. The time taken to apply was attributed to the finalization of the ‘land
usage pattern’ for the mine which was required to be submitted along with the application for
forest clearance.
2.13 The Company’s application for forest clearance was required to be forwarded by the
State Government to the Ministry of Environment and Forest (MoEF), Government of India
for final approval. However, in the meantime, there was a letter (August 2001) from the
MoEF to Government of Karnataka (GoK) asking it not to forward any new or renewal of
proposals of mining lease for diversion of forest land in Bellary district till the Joint Team
appointed by Ministry of Mines for suggesting policy guidelines for renewal or grant of new
mining leases in Bellary – Hospet sector submits its report. As a result, GoK did not forward
NMDC’s application to MoEF. In September 2001, Additional Secretary of Department of
Mines held a meeting and asked GoK to conduct rapid Regional Environmental Impact
Assessment (EIA) study of Bellary – Hospet sector by 31st January 2002. The job was
assigned to National Environmental Engineering Research Institute, Nagpur (NEERI).
5
8
Earlier the Company had applied (August 1998) for diversion of 265.15 ha of forest land but later withdrew
it as the land use details were not firmly worked out. Subsequently, revised application for 278.35 ha within
mining lease area and 64.725 ha outside mining lease area was submitted in February 1999. Subsequently,
based on engineering survey details, revised area was worked out and a firm forest clearance application
was submitted in July 1999 for 324.70 ha within mining lease area and 16.50 ha outside mining lease area,
totaling to 341.20 ha.
Report No. 20 of 2012-13
2.14 In the meantime, the Company and the Ministry made efforts to persuade Government
of Karnataka to forward NMDC’s application to the MoEF. In reply to the letter from the
Minister of State for Steel, the Minister for Environment & Forests stated (September 2002)
that NMDC cannot be excluded from the ambit of Regional EIA study.
2.15 NEERI submitted its report on 29 September 2002. MoEF, thereafter in February
2003, allowed GoK to forward forest land diversion cases to it. Even then Government of
Karnataka took two years to forward the application to MoEF which was finally sent to the
latter in February 2005.
Though NMDC requested Government of Karnataka immediately in February 2003 to
forward its application to MoEF, the Under Secretary of Forest, Environment &
Ecology, Department of GoK, in January 2004, addressed a letter to the Principal Chief
Conservator of Forest informing him that GoK, after verification of the proposal, found
that the consideration of the NMDC’s proposal was not possible. No reason was
provided in the letter.
While the application of the Company was not forwarded to the Ministry of
Environment and Forest, Government of India for inexplicable reasons, a notification
was issued on 15 March 2003 by Government of Karnataka de-reserving 11620 square
Km for private mining which otherwise was meant for state exploitation/ mining for
public sector. The following excerpts from the Lokayukta’s report of December 2008
are relevant.
“The Government in its orders vide notification No. CI 16 MMM 2003 and No. CI
33 MMM 1994 both dated 15.03.2003, dereserved for private, mining an area of
11,620 square km in the state, meant for State exploitation/ mining by the public
sector and notified the surrender of an area of 6,832.48 hectares of prime iron ore
bearing lands respectively, which has paved way for distribution of public assets to
select private individuals/ entities without regard to their professional or technical
or business background.
The entire exercise was undertaken in a manner so as to benefit only a select few
individuals/ entities. The main objectives behind de-reservation i.e. to encourage
mining based industries to create more employment opportunities in private
sector, to attract private capital and professional management for optimal use of
state mineral resources were given a go by and allotments were made to the
applicants on considerations other than merit.”.
The Company further furnished (August 2004) the replies to the 12 questions/ points
raised by Karnataka Government. These questions related to mining activities and
consequential measures to be taken up by the Company.
The Government of Karnataka finally forwarded NMDC’s application to MoEF in
February 2005.
2.16 The forest clearance was received from MoEF in July 2006. In the meantime, the
environmental clearance had also been received (October 2004). Though the forest clearance
9
Report No. 20 of 2012-13
was in place in July 2006, the Company could not proceed with the implementation of its
project until February 2009, i.e., till the time of receiving the tree cutting permission from the
Department of Forests of Karnataka Government. The related developments are narrated
below:
Based on forest clearance of MoEF, the GoK issued their clearance in January 2007 to
work in the forest area with a condition that the Company shall execute the agreement
with the Forest Department.
The Company tried to execute the agreement at the earliest but, according to the
Ministry’s reply to Audit, M/s Deccan Mining Syndicate Private Limited (DMSPL)
intervened and communicated to Forest Authorities of Bellary that there were pending
cases6 of NMDC in the courts and there should not be any execution of forest
agreement with concerned authorities. The execution of forest agreement was kept
pending by Forest Authorities, Bellary.
The High Court disposed off (March 2008) the case in favor of NMDC. Thereafter, the
Company’s officials coordinated with forest officials for tree enumeration work and
tree cutting permission. The permission was received in February 2009 from the Forest
Department.
2.17 The foregoing details explain how the Company, after applying for the forest
clearance in July 1999, could not take up implementation of the project until February 2009
due to delays in getting statutory clearances. These delays contributed significantly to the
overall delay in the project and resultantly to the huge cost overrun of the project.
Appointment of Consultant
2.18 The Company had in the meanwhile initiated in December 2005 the process for
selection of consultant for consultancy services for Engineering, Contract Procurement
services, Project Management and Construction Management Services (EPC). The Company
in July 2006 appointed MECON, by floating a limited tender enquiry, as EPC consultant at a
cost of ` 7.70 crore, immediately after receiving the forest clearance. Though the original
DPR approved by the Board in April 2003 envisaged a project cost of ` 296.03 crore, it
became irrelevant in view of the long delay in getting the environmental and forest clearance.
According to the consultancy contract (July 2006), the project was to be completed in 39
months, i.e., by October 2009. Even this timeframe became redundant due to delay in getting
forest clearance.
6
10
DMSPL had filed a petition contending that the sketch enclosed with the renewal of mining lease
(application by NMDC) encircled their mining lease area of 47 acres and also free area of 188 acres got
included in the mining area of NMDC.
Report No. 20 of 2012-13
Implementation of the project
2.19 The agreement with MECON envisaged the following activities with timelines against
each activity. The counting of timelines is done by Audit from August 2008 as the agreement
with the Forest Department was signed in July 2008.
Table 2: Activity wise scheduled completion and actual completion
Time frame
To be
(in months) completed by
Activity
Award
contracts
of
12
July 2009
Execution
of
packages of the
project
Performance
Guarantee Test
21
April 2011
6
October 2011
Delay in months
(up to March
2012)
Package 1 - August 2010
13 months
Package 2 - April 2011
21 months
Package 3 - November 2010
16 months
Package 5-A – July 2011
24 months
Package 5-B – February 2012
31 months
Package 5-C – March 2012
32 months
Package 4 and 6 – not yet
Beyond 32
awarded.
months
Packages are still under
11 months
implementation.
Actual date of completion
As the packages are still
under implementation, no PG
test was completed so far.
5 months
2.20 The implementation of the Project has already been delayed as it is expected to be
completed only by January 2013, i.e., after a delay of 15 months from the intended date of
completion. The specific issues relating to implementation are dealt with in the succeeding
paragraphs.
Award of contract
2.21 The total project work has been divided into six packages. MECON was required to
finalize specifications, tender documents and complete the process of award of contracts
within 12 months, i.e., by July 2009. However, the award of contract was delayed in all six
packages. As of March 2012, the contracts in respect of four packages could be awarded as
shown below:
Table 3: Delays in award of contracts Package wise
Package number and activity
1.
2.
3.
5-A.
Crushing Plant
Downhill conveyor
Electrical works
Civil and structural works
including water supply
5-B. Service Centre
5-C. Electric
Overhead
Transport Cranes
First floating
of tenders
August 2007
January 2010
April 2008
January 2011
Award of
contract
August 2010
April 2011
November 2010
July 2011
Delay with reference to
July 2009 (in months)
13
21
16
24
May 2011
July 2011
February 2012
March 2012
31
32
11
Report No. 20 of 2012-13
The reasons for the delays in award of packages have been analyzed below.
Package 1: Crushing Plant
2.22 Crushing Plant package is the crucial package for the development of the mine. The
Notice Inviting Tender (NIT) for the package was issued in August 2007 and after retendering, the contract was finally awarded in August 2010. In this regard, we observed the
following:
MECON submitted the draft tender documents to the Company in December 2006.
However, these documents were not complete. MECON kept submitting the tender
documents in piecemeal. It submitted prequalification criteria (PQ) in January 2007 and
commercial (payment) terms in April 2007 and cost estimates in May 2007. Thus,
MECON took abnormally long time in preparing the tender documents.
The Company appointed a consultant to conduct the soil investigation in December
2006 and finally got it done in September 2007. As a result, there were changes in the
methodology7 to be adopted for earth work excavation. This led to extension of the
date for submission of tender documents to 7 January 2008.
As the ‘area layout’ plan for crushing plant prepared by MECON needed revision, the
last date for submission was further extended beyond 7 January 2008. MECON
submitted the final ‘area layout’ plan in March 2008 and the Company approved the
plan on 17 March 2008.
The bidders (only two had come forward on 7 January 2008 to submit their offers)
could have submitted the tenders then. But the Company decided to include FL Smidth
make crusher (which was not included in the original tender) in the approved makes.
This decision was based on the recommendation of the committee8 which visited Joda
mines of TATA steel where this make was installed. As the tender process was
underway, there was little justification to include one more make at the late stage
particularly when the records of the Company did not provide any justification for
inclusion of this make. This necessitated cancellation of original tenders in May 2008.
Later in June 2008, the Company again asked for certain changes in the area layout
plan. This should have been taken care of by the Company while approving the plan in
March 2008. MECON based on the Company’s observations, revised the tender
documents and submitted the same to the Company in January 2009. The reasons for
the delay are not on record.
The new NIT was published in January 2009 with the due date for submission of the
tender by 19 March 2009, which was extended to 20 April 2009. Five bidders
7
8
12
In the initial tender only reinforced earth retaining walls/ soil nailing was specified for earth protection.
Subsequent to soil investigation, it was decided that tenderer may be given the option to adopt any method
he finds suitable/ cost effective for the project. This led to changes in tender specifications with regard to
excavation and further time extension.
Committee consisted members of NMDC and MECON.
Report No. 20 of 2012-13
participated but only two of them were found technically qualified. Both of them,
however, did not meet the PQ criteria9 and hence the tender was abandoned in August
2009.
The re-tendering was done in October 2009 by relaxing PQ criteria. Though the tenders
were received in November 2009, the tardy processing by the Company in evaluation
and seeking of clarification finally led to delay in award of work which was done in
August 2010 to the lowest tenderer, FL Smidth Minerals Private Limited.
2.23 Thus, the award of Package 1 was delayed due to delay in preparation of tender
documents by MECON, delay in providing the requisite information by the Company to
MECON and frequent changes by the Company in the tender conditions. While it is
true that the work could not have started without the tree cutting permission, it is also
true that the contract could be awarded only in August 2010, though the tree cutting
permission was available in February 2009.
2.24 Ministry stated (July 2012) that the time taken (total 9½ months from receipt of bids)
for finalization of Package 1 is not unreasonable by considering the time taken from issue of
revised tenders in October 2009 and award of work in August 2010. The fact is that, the
Company had initiated the process in August 2007 and finally, the work could be awarded in
August 2010. The Company took 37 months for finalization of award.
Package 2: Downhill Conveyor
2.25
In respect of Package 2, we observed that:
As per the initial plan in 2003, the downhill conveyor was to be extended up to
Donimalai screening plant from Kumaraswamy Iron Ore Project hill top. However, in
December 2008, the Company decided to truncate the downhill conveyor to match with
the new screening plant location and add another conveyor from that point to the
existing Donimalai screening plant.
The planning regarding whether to use the existing Donimalai screening plant or install
a new one should have been done at the DPR stage itself in April 2003. Nonetheless, it
was also possible to quickly decide on this issue after appointment of the consultant in
July 2006. However, the decision to add another conveyor plant was delayed till
December 2008.
9
PQ criteria inter-alia included that (i) the tenderer / collaborator should have engineered and constructed
at least one crushing plant with a gyratory crusher in the last ten years. As L&T supplied crusher eleven
years back, the PQ was modified to 15 years. (ii) Another PQ was that, in case of collaborator/ associate of
the collaborator, they shall jointly and individually be responsible for the execution of the contract for
which the necessary guarantees shall be furnished by them to the Company in the form of BG for their
share.
F. L. Smidth did not agree to this criteria and informed that in addition to the BG to be submitted by
F. L. Smidth, they will also submit additional BG which otherwise was to be submitted by their
collaborator,
F.L. Smidth CEntry. The tender terms were relaxed and both the BGs were given by F. L. Smidth only.
13
Report No. 20 of 2012-13
Even after taking the decision regarding screening plant in December 2008, MECON
took eight months to submit the first draft of tender documents in August 2009. The
final draft was approved by the Company in December 2009 and NIT was issued in
January 2010. Tenders were opened in April 2010 but the Company and MECON took
one year to award the contract. Considerable time was taken for bid evaluation, price
negotiations and Board approval. Finally, the contract was awarded to ELECON in
April 2011 with completion time of 21 months. This again indicates the poor project
management.
2.26 The Ministry attributed the delay in tendering activity to finalizing the land agreement
with Bharat Mines & Minerals through whose land the conveyor corridor was to pass. This
agreement was finalized in August 2009. The subsequent delay in processing was attributed
to time taken in bid evaluation/ discussion with bidder’s foreign associates.
Package 3: Electrical Works
2.27 In respect of Package 3, we observed that the electrical works were mainly required to
be done for Package I and II. As the award of work for these packages was delayed, the
Company abandoned the contract procedure initiated in March 2008 and re-tendered the work
in April 2010. The contract was awarded in November 2010 with a completion time of 15
months.
Package 4: Telecommunication works
2.28 In respect of Package 4, we observed that though the tender documents were prepared
in July 2008, the tendering process was not undertaken due to delay in first two packages.
The Company asked MECON (May 2011) to revise the tender cost in view of efflux of time.
MECON submitted the revised tender documents in July 2011 and the tenders were floated in
August 2011. The award of work was expected to be completed by May 2012. The Ministry
(July 2012) stated that this was a non-critical package of nine months duration and the
successful bidder would have to work in facilities created under Package I and II and hence,
the award of this package was being regulated accordingly.
Package 5: Hill top facilities
2.29 In respect of Package 5, we observed that NIT was issued in March 2008 but since
there was no response to the tender, the package was split into three sub-packages in July
2008. MECON took a long time to submit draft tender documents for these packages. The
tender documents were submitted between June 2010 and October 2010. Apart from the
abnormal delay on the part of MECON, the Company also delayed the approval of tender
documents by six to eight months. The NITs for sub-packages were issued during January
2011 to July 2011. There was no justification for the delay in the process of award of work.
Water supply sub-package was awarded in July 2011 and works are in progress. Service
centre package and cranes package were awarded in February and March 2012 respectively.
14
Report No. 20 of 2012-13
Package 6: Approach Road
2.30 In respect of Package 6, we observed that MECON submitted the draft tender
documents in November 2010. The Company asked (December 2010) MECON to redesign
and revise the tender documents as the basis for design parameter was incorrectly considered.
Soil investigation report was forwarded by the Company to MECON in March 2011. The
revised documents were received from MECON in August 2011. The tender was floated by
MECON with due date of tender opening in November 2011. The techno-commercial
scrutiny is going on at NMDC and the award of contract is expected to be completed by May
2012.
2.31 The Ministry stated (July 2012) that Package 5 and 6 were not directly related to
commissioning of the project and award of work for Package 6 is under finalization and is
likely to be awarded shortly.
2.32 As can be seen from above, the award of contracts, expected to be completed by
July 2009, i.e., within 12 months from the date of signing the agreement with Forest
Department, was actually completed in case of four packages after a delay of 13 months
to 32 months. In respect of other two packages, the contracts were yet to be awarded by
March 2012.
Implementation of Packages
2.33 The execution of the packages was to be completed within 21 months from the award
of the contracts. The details of progress in implementation of the packages is given below:
Table 4: Table indicating the packages in respect of which works have been awarded
(As of 31 March 2012)
Package
Date of
award of
work
Projected
date of
completion
as per
contract
Present
status
1
August 2010
2
April 2011
3
November 2010
5A
July
2011
5B
February
2012
5C
March
2012
May 2012
[Extension sought
by supplier up to
June 2013]
January 2013
February 2012
[Extension
granted up to
November 2012]
April
2012
November
2012
January
2013
Design &
Engineering
completed. Civil
works in progress.
Imported
equipments
inspection
completed and
supplies in
progress.
Physical Progress:
54%
Design &
Engineering is
in advanced
stage.
Excavation and
road work are
in progress.
Physical
Progress: 26%
Design &
Engineering
completed.
Major
equipments
inspection &
dispatch in
progress.
Physical
Progress: 59%
Service Centre Package and
Cranes Packages awarded in
March 2012.
15
Report No. 20 of 2012-13
2.34 The work is in progress and going by the pace of implementation of Packages 1, 2 and
3, the prospects of scheduled completion by January 2013 appear bleak. The implementation
of Packages 1 and 3 is getting delayed beyond the scheduled completion date and the reasons
are:
Package 1: Though award was dated 30 August 2010, clarifications on commercial
points were furnished by the Company on 14 October 2010 after a period of two
months. As the deviations were noticed (March 2011) on the soil conditions in actual
vis-à-vis as indicated in the tender documents, final decision was taken in a meeting
with MECON, FL Smidth and the Company in August 2011. In December 2011, the
design parameters of Primary Crushing House (PCH) Building/ foundation and scheme
of Dumper platform were frozen. This resulted in delay in subsequent activities of
material planning, procurement and construction activities at site. FL Smidth requested
the Company to extend time till June 2013 for completion of PG test.
Package 3: Due to carrying out changes in civil and structural drawings submitted by
the Contractor as proposed by MECON, there was delay in finalization of drawings.
There was also a lapse of six months (September 2011 to February 2012) on finalizing
the vendors for procurement of steel by NMDC/ MECON. Further, according to the
contractor, ban on mining activities by Hon’ble Supreme Court in August 2011 resulted
in difficulties in procurement of sand, jelly etc. The same were transported from far off
places and this affected progress at site.
Impact of delay on commissioning of the project
2.35 The delay in completion of Kumaraswamy project resulted in revision of project cost
from ` 296.03 crore (April 2003) to ` 898.55 crore (December 2010) which was due to
revision of capacity from 3 MTPA to 7 MTPA and due to creation of additional facilities
(` 320.00 crore) and general price rise (` 282.52 crore). The delay and consequent increase in
cost due to price rise are mainly attributable to delays in receiving the statutory clearances
and subsequently due to poor project management by the Company. The project is now
scheduled to be completed by January 2013.
11B Deposit
2.36 The Company assessed (January 2003) the shortfall between demand and supply of
iron ore from Bailadila sector to be 7.80 MT by 2006-07. Therefore, the Board accorded
(January 2003) in-principle approval to develop 11B Deposit at Bailadila in Chhattisgarh and
to prepare Detailed Project Report (DPR) to meet the projected shortfall of iron ore. The
Board approved (March 2004) an estimated expenditure of ` 15.57 crore for preparation of
DPR, statutory clearances and pre-construction works. In order to take advantage of the
booming market, the Board directed for commencement of pre-construction work in parallel
to DPR preparation to save 10 months time out of scheduled 49 months for completion of the
project. The Company had also initiated action for preparation of DPR in October 2003 by
16
Report No. 20 of 2012-13
NMDC decided to develop 11B Deposit mine in
2003. This project, expected to add capacity of
7 MTPA, was still under implementation as of
March 2012.
***
Delays were noticed in 11B Deposit Project in
Chhattisgarh. The initial project cost of
295.89 crore went up to 607.17 crore due to
revision of capacity from 3 MTPA to 7 MTPA
( 139.17 crore) and general price rise
( 172.11 crore).
***
Slated to be completed by October 2008, the
11B Deposit Project is still in progress due to
controllable delays in awarding contracts for
development and also due to external
constraints.
officials from various departments of the
Company and prepared the report in July
2004. It was proposed to develop 11B
Deposit with a capacity of 3.0 MTPA by
utilizing the existing infrastructure such as
screening plant, tertiary crushing plant,
loading plant, administrative set up and
other facilities in order to bring down the
overall capital investment and operating
cost of the project so that it would be most
competitive.
Receipt of statutory clearances
2.37 The Detailed Project Report (DPR)
to develop the 11B Deposit at an estimated
cost of ` 295.89 crore was approved
(January 2005) by the Board. The project cost was revised (January 2008) to ` 468 crore and
further (May 2008) to ` 607.17 crore. The increase in project cost was due to increase in
design capacity from 3 MTPA to 7 MTPA (` 139.17 crore) and increase in prices (` 172.11
crore). The time lag in taking up the project was on account of the following:
Though the Board approved the project in principle in January 2003, the Company
applied for forest clearance in December 2003 only and the same was received in
January 2005. The period of 10 months in submission of application for forest clearance
could have been curtailed with better planning and management.
The Company applied for No Objection Certificate (NOC) to the State Government in
May 2004 and received the same in November 2005. Thereupon, it applied (December
2005) for Environmental Clearance (EC) from MoEF, which was received in September
2006.
Appointment of Consultant
2.38 Against a limited tender enquiry floated (March 2005), MECON was issued (July
2005) Letter of Intent (LOI) for consultancy services for Engineering, Contract procurement
services, Project management and Construction management services.
Implementation of the project
2.39 As per the PERT chart, the project was scheduled to start by July 2005 and completed
by October 2008. The same was revised to January 2007 and September 2011 respectively.
With reference to the initial PERT chart, the status of activities, timeframe and progress is
given below:
17
Report No. 20 of 2012-13
Table 5: Table indicating the milestones and achievement in respect of 11B Deposit
Activity
Procurement
(Award of
contracts)
Execution of
packages of the
project
Performance
Guarantee Test
Time
frame
(in
months)
1210
To be
completed
by
July 2006
21
April 2008
6
October
2008
Actual date of
completion
Delay in months
(up to March 2012)
3 Major packages
August 2007
Others - July 2011
- Major packages
–13 months
Others
– 60 months
Packages are still under
47 months
implementation.
As the packages are still
under implementation no
PG test was completed so
far.
41 months
2.40 The implementation of the project has already been delayed at least by 41 months
(March 2012). The project is expected to be completed by November 2012, i.e., after a delay
of 49 months. While a part of the delay is attributable to late receipt of Environment
Clearance (EC), we noticed that the delays in implementation were also due to deficient
planning and tardy project management and these delays were very much controllable.
Delays were also attributable to external constraints. Specific issues involved in the
implementation are discussed below.
Award of contract
2.41 The total project work has been divided into seven packages. MECON was required
to finalize specifications, tender documents and complete the process of award within 12
months, i.e., by July 2006. However, the award of contract was delayed in all seven
packages. As of March 2012, the contracts in respect of all packages have been fully awarded
as shown below. The delay has been worked out with reference to November 2006, i.e., two
months after the receipt of environment clearance. As the Company had appointed the
consultant in July 2005 itself, the tendering could have been completed and orders kept ready
to be issued immediately after receipt of EC.
10
18
The Board proposed (March 2004) 12 months time schedule for preconstruction work (award of contracts).
The PERT chart for Package I also provided for 12 months for preconstruction activities.
Report No. 20 of 2012-13
Table 6: Table indicating the delays in award of contract for 11B Deposit
Package
No.
1
2
3
4
5A
5B
Activity
Crushing Plant &
Stacking section
Downhill conveyor
Earthwork and site
preparation
Electrical sub-station
and Power
distribution system
Water supply,
Reservoir and piping etc.
Delay with
reference to
November
2006
(in months)
First floating
of tenders
Award of
contract
November
2006
November
2006
February
2006
August 2007
August
2007
May 2007
9
TRF Limited
6
December
2006
March 2008
1
Sandvik Asia
Limited
Ratna
Constructions
Siemens
Limited
August 2009*
16
June 2010
November
2010
November
2010
February
2011
43
48
Local
contractors
48
BCC Infracon
51
Lalitha
Engineering
June 2010
July 2011
56
Alpha
Services Ltd.
Infonet Asia
private
Limited
New Fire
Engineers Pvt
Ltd
February
2010
May 2010
6
Service centre buildings
etc.
Electrical Items
(Transformers, wiring,
Panel etc.)
Supply and erection of
cranes
Telecommunication system
July 2008
October
2008
23
7
Fire protection system
May 2008
January
2010
38
5C
5D
Name of the
contractor
* No party participated and hence the scope of work was further split as (1) Departmental (NMDC) purchase
of pipes and valves; (2) Construction of RCC ground level water reservoirs (with supply of steel
and cement by department); and (3) Erection of water pipe line from 11C to 11B.
2.42 Even after taking into consideration the date (September 2006) of receipt of EC, the
process of award of contract should have been completed by September 2007 as the
consultant had already been appointed in July 2005. We noticed that the Company had
awarded first three Packages by September 2007, Package 4 and 6 were awarded by October
2008. However, Package numbers 5 and 7 were badly delayed as explained below.
Though MECON submitted the tender documents for Package # 5 in November 2006
itself, it took a long time for the Company to approve these documents in January 2008.
This was due to revisions made in the drawings. However, the Company could have
managed the process better by setting the timeframes and strictly monitoring the
adherence to the timeframes. The matter, however, was allowed to take its own course.
Subsequently, the tenders issued in February 2008 were cancelled for want of response.
The work was then split into four sub-packages (August 2008). Tardy processing saw
19
Report No. 20 of 2012-13
these getting awarded only by July 2011. This indicates poor project management by
the Company.
So far as Package # 7 is concerned, there was delay in preparation of tender documents
which were submitted by MECON in February 2008. Though NIT was issued in May
2008, the process of award of contract was delayed up to January 2010 due to
processing of tenders and revision in cost estimates. The delay was avoidable with
proper monitoring.
2.43 The Ministry (July 2012) stated that Package for Telecommunication (Package 6) and
Fire detection and alarm system (Package 7) are not linked directly with commissioning.
However, these packages cannot be executed unless fronts are made available by Package 1
and 2 contractors. Award of these Packages got delayed due to Maoist activity which
resulted in no offers from bidders. Therefore, the Company split the original packages into
rate contract jobs. The Ministry admitted that there were delays but stated that there was no
impact on the overall project. While it is true that the Company faced external constraints, it
is also true that there were delays in the activities which were within the control of the
Company and the consultant.
Implementation of packages
2.44
The details of progress in implementation of packages are given below:
Table 7: Table indicating the progress in implementation of packages
Package no and description of work
1.
2.
Crushing
Plant
Stacking section
Downhill conveyor
and
3.
†
Date of award of
contract
PDC as per
contract
Physical progress
in % (March
2012)
Contract
cost
( in crore)
Payment
( in
crore)
August 2007
May 2009
70
115.19
83.18
May 2007
February
2009
November
2007
March 2009
75
115.71
82.32
96
75.29
73.12
91
10.99
7.98
Earthwork
and
site
preparation
4.
Electrical sub-station and
Power distribution system
5A. Water Supply, Reservoir
and Piping etc
December
2006
March 2008
November
2010
March 2011
86
1.41
0.63
5B. Service centre Buildings,
etc
5C. Electrical
Items
(Transformers,
Wiring,
Panel etc)
5D. Supply and erection of
cranes
6.
Telecommunication system
7. Fire Protection System
November
2010
February 2011
November
2011
February
2012
58
17.33
4.48
51
2.36
0.55
July 2011
May 2012
45
1.54
0
October 2008
January 2010
Total
October 2009
January 2012
51
68
1.78
7.36
348.96†
1.11
4.76
258.13
Total 11B project cost is 607.17 crore including 181.88 crore for purchase of mining equipment, 33
crore for township/ additional facilities; 23.55 crore for Environmental Management Plan; and balance for
services/ Admn. Exps./ Contingencies etc.
20
Report No. 20 of 2012-13
2.45 As can be seen from above, Packages # 1, 2, 3, 4 and 6 which were scheduled to be
completed between November 2007 and October 2009 were yet (March 2012) to be
completed. Key points relating to delays are discussed below.
Package # 1 (Crushing Plant & Stacking section) was delayed as the site for primary
crusher was handed over to the contractor only in July 2008. This delay was due to
delay in implementation of package # 3 (Earthwork and site preparation). In addition
to this, law and order problems and delays on the part of the contractor (TRF Limited)
were also responsible.
Package # 2 (Downhill Conveyor) was also delayed as the site for Downhill Conveyor
System was handed over to the contractor only in May 2009. The delay was due to
delay in implementation of package # 3. In addition to this, non-availability of
construction materials and delay in submission/ approval of drawings were also
responsible.
Package # 3 (Earthwork and site preparation) scheduled to be completed by November
2007, was yet (March 2012) to be completed. The delay was attributable mainly to
increase in estimated earthwork, problems in soil due to bouldary nature of soil and
introduction of grouted nails. Nonetheless, the time taken appears to be too long.
Package # 4 (Electrical sub-station and power distribution system) was delayed due to
delay in submission of drawings by the contractor and also due to delay in completion
of package 1 and 2.
Package # 6 was delayed as fronts were not ready for installation of telecommunication
system.
2.46 There was delay in award of works relating to Package 5 and 7. Further, it was
observed that there were delays in the implementation of Package 5 and 7 also.
In respect of Package 5, electrical works were delayed as site was not ready for taking
up electrical works and the civil works to most of the buildings were still under
construction. Site was not ready for setting up of cranes. Approved drawings were not
submitted to the contractor even by April 2012 (award of work: November 2010) by
MECON in respect of location of fire station, roads and drains.
Package 7 was delayed as the mechanical work could not be started since no front was
made available to the contractor to take up the work as conveyor work was in progress.
Clearance to take up the work could be given only after completion of construction of
conveyor.
2.47 The Ministry (July 2012) stated that contractors for Package 1 and 2 were unable to
execute the project at a pace acceptable to the Company owing to problems in mobilization
of resources and manpower due to Maoist activities. However, apart from external factors,
deficient project management was also responsible for delay.
21
Report No. 20 of 2012-13
Impact of delay on commissioning of the project
2.48 The delay in completion of 11B project resulted in revision of project cost from
` 295.89 crore (January 2005) to ` 607.17 crore (December 2010) which was due to revision
of capacity from 3 MTPA to 7 MTPA (` 139.17 crore) and general price rise (` 172.11
crore). The project is now scheduled to be completed by November 2012, the chances of
which appear bleak as Package 7 completion date was extended up to January 2013.
2.49 The Ministry stated (July 2012) that re-discovery of additional reserves in Kirandul
project due to extensive drilling, gave a fresh lease of life to the mine. This development
necessitated re-visiting of the project plant and equipment capacities along with logistics.
The Ministry contended that 11B was only envisaged as a replacement mine for Deposit 14
and was not intended to be in operation in addition to that mine.
2.50
The reply of the Ministry is not convincing in view of the following:
The contention of the Ministry that the Company had to re-visit the project plant and
equipment capacities and logistics in view of the re-discovery of additional reserves in
Kirandul is not seen in the records of the Company.
There were delays due to external constraints which occurred during execution.
However, there were delays on the part of the Management in finalizing the award of
packages and in finalizing the drawing post award of contracts.
Even if it is accepted that the Management had re-discovered additional reserves, the
Management could have gone ahead with the development of the mine and could have
regulated its production with the market conditions.
2.51 The Ministry further stated (July 2012) that, even though in isolation, when
compared with the time schedule mentioned in the consultancy contract with MECON,
the award of work for the above package works is noticed to have been delayed, but
actually there is no impact on the overall project considering the dependency of
package work one over the other. It also stated that the relevant points brought out in the
audit report have been noted by the Company and actions will be taken as part of the
continual improvement efforts of NMDC.
2.52 The Company agreed with the recommendation. It stated (December 2010) that two
General Managers and one Deputy General Manager were posted to head the three branches
of project division, i.e., engineering, contracts and projects. For each project, an officer of the
grade of Joint General Manager/ Dy. General Manager has been appointed as project
manager who is directly responsible for doing complete coordination between planning and
implementation and monitoring set up. Director (Technical), other Directors and CMD have
been taking monthly reviews of all the projects.
Recommendation # 2
The company needs to enhance its project management capability by focusing on
project planning, implementation and monitoring. In this regard, the Company needs
to specify the timeframes and milestones for all project activities and ensure their
strict adherence through continuous monitoring and requisite remedial action.
22
Report No. 20 of 2012-13
Chapter – 3
Evacuation Facilities
Evacuation refers to transporting iron ore from mines to the buyers’ sites/ ports. The
evacuation capacity of the Company was 30 MTPA (23 MTPA at Bailadila sector and 7
MTPA at Donimalai sector) as against the total installed production capacity of 32 MTPA.
This chapter deals with the evacuation bottlenecks affecting the production.
NMDC had an evacuation capacity of
30 MTPA as against the production
capacity of 32 MTPA. The shortfall was at
Bailadila sector in Chhattisgarh.
***
Though the evacuation capacity turned
inadequate in 2007-08, the three options
available to enhance the capacity were not
pursued swiftly by NMDC.
***
The Board approved laying of a slurry
pipeline (capacity of 8 MTPA) from
Kirandul to Visakhapatnam in July 2008
but only ‘due diligence’ could be
completed by March 2012.
***
Another option of doubling of Kirandul –
Jagadalpur railway line to enhance the
capacity by 3 MTPA was taken up in JCM
with Railways only in February 2010 and
not pursued vigorously thereafter.
Fig 2: Aerial view of downhill conveyor at Bacheli
3.1
We observed that while the evacuation
capacity matched with the production capacity
at Donimalai sector, there was a mismatch between evacuation vis-à-vis production capacity
at Bailadila sector to the extent of 2 MTPA as discussed below:
Bailadila Sector: Inadequate evacuation capacity
3.2
The evacuation of the production is carried out mainly through Railway line called
KK Line (Kirandul –Kothavalasa line). The capacity of the railway line as assessed by the
Company in 2003 was 16 MTPA. A small quantity was transported through road. In addition,
seven million tonnes per annum was despatched through a slurry pipe line laid and owned by
ESSAR Limited (a customer) from 2005-06. Thus, the total evacuation facilities available at
Bailadila sector were 23 MTPA against installed capacity of 25 MTPA since 2007-08.
Therefore, there was a mismatch in the evacuation facilities vis-à-vis production facilities at
Bailadila sector to the extent of two MTPA.
23
Report No. 20 of 2012-13
3.3
The table below indicates the installed capacity, the actual production facilities and
actual evacuation capacity vis-à-vis quantity dispatched through different modes for the past
seven years ending 31 March 2012 at Bailadila sector.
Table 8: Table indicating the evacuation capacity and the actual dispatches (Bailadila Sector)
(in MTPA)
Details
Installed capacity
Actual production
Annual productionplan
Evacuation capacity:
through rail
through pipeline
Total
evacuation
capacity
Actual Dispatches:
1. by rail
2. by road
3. by slurry pipeline
Total Dispatches
2005-06
2006-07
2007-08
Years
2008-09
2009-10
17.22
17.42
18.55
18.00
20.56
21.00
25.00*
22.97
23.80
25.00
22.15
26.12
16.00
7.00
23.00
16.00
7.00
23.00
16.00
7.00
23.00
16.50
00.12
01.98
18.60
14.28
00.24
05.86
20.38
14.73
00.24
06.82
21.79
2010-11
2011-12
25.00
18.08
23.90
25.00
20.90
20.20
25.00
21.65
20.50
16.00
7.00
23.00
16.00
7.00
23.00
16.00
7.00
23.00
16.00
7.00
23.00
14.27
00.24
06.39
20.90
15.42
00.26
02.24
17.92
17.40
01.18
02.86
21.44
16.73
01.02
03.84
21.59
* The increase was due to increase in the installed capacity in 2007-08 at Bacheli from 11 MTPA
to 13 MTPA and at Kirandul from 7 MTPA to 12 MTPA.
3.4
As can be seen from above, the evacuation capacity turned inadequate with reference
to the installed capacity in the year 2007-08 and continued to be inadequate thereafter. The
evacuation capacity further suffered a setback when the slurry pipe line of ESSAR (capacity
7 MTPA) was damaged in May 2009. This was restored in December 2010, but was again
damaged in October 2011. The same is yet to be restored (March 2012).
3.5
Evacuation capacity determines the quantum of production and should match with the
production capacities in existence as well as to those envisaged. Any mismatch in evacuation
facilities with production capacities leads to piling up of stocks, resulting in not meeting the
demand of customers. The production for 2003-04 at Bailadila sector was 13.66 MT and the
Company sold 16.37 MT (including stock) which was in line with the evacuation facilities.
With the gradual increase in production from 13.66 MT in 2003-04 to envisaged production
of 24.45 MT by 2009-10 as per Corporate Plan, there was every need to augment the existing
evacuation capacity. However, this area was neglected. The following measures were/ are
available to the Company to optimize and enhance the evacuation capacity:
A.
B.
C.
D.
24
using the existing rail evacuation capacity optimally;
laying of uni-flow system at Bacheli;
establishing a new pipeline; and
doubling of railway line between Kirandul and Jagdalpur.
Report No. 20 of 2012-13
3.6
The Company also faced constraints during 2006-09 when the adequate number of
rakes were not made available by Railways. The performance of evacuation through
Railways improved during 2009-10 and remained at satisfactory level thereafter. A uni-flow
system at its Bacheli complex, envisaged to bring about smooth movement of rakes and
increase the capacity by 4 MTPA, was delayed. The system slated for completion by June
2007 was completed only by May 2012, the benefits of which would accrue in the years to
come. The performance in respect of C and D above has not been satisfactory.
3.7
Ministry in its reply (July 2012) while accepting that augmenting evacuation capacity
is a strategic requirement for bringing about its future production plans to realization, stated
that the dispatch for the year 2011-12 was more than 27 MT compared with 25 MT during
2010-11 despite the fact that the ESSAR pipeline was not operational in substantial parts of
both the years. The dispatches, as stated by the Ministry, pertained to both Bailadila and
Donimalai sectors and the audit observation was only on dispatches made from Bailadila
sector. The combined installed production capacity for both Bailadila and Donomalai sector
was 32 MTPA.
3.8
The progress made by the Company in respect of above measures is discussed below.
Establishing a new pipeline
3.9
As the evacuation by Railways was a constraint during 2006-08, the Company had
another option of going in for a new pipeline to evacuate production from Bailadila to
Visakhapatnam. The pipeline was estimated to have an evacuation capacity of eight MTPA.
The Board of Directors accorded (July 2008) in-principle approval for laying of a slurry
pipeline from Kirandul to Visakhapatnam at an estimated cost of ` 2500 crore. Though
approval was accorded in July 2008, it remained pending at the Commercial Department till
November 2009. Technical wing initiated steps afresh for award of work relating to Techno
Economic Feasibility Report (TEFR) in November 2009. Given the constraint on evacuation
front, this delay of 16 months was avoidable.
3.10 In spite of constraints on evacuation front, the Company did not handle the matter of
establishment of a new pipeline with required urgency. As a result, even after four years
since the in-principle approval was given by the Board, the project is yet to take off. The
delay was avoidable.
3.11 The Ministry in reply (July 2012) stated that initially TEFR was prepared by MECON
and due diligence on the TEFR was carried out by IFCI. The phasing of the project is
envisaged to be completed in three phases. This was later modified as follows: Phase I to
include construction of beneficiation plants to produce two MTPA Pellet Feed Concentrate
from Bacheli Complex along with a slurry pipeline from Bacheli to Nagarnar and a pellet
plant at Nagarnar to produce Blast Furnace grade pellets. Phase II consists of augmentation
of production facilities for production of pellets to 4 MTPA at Bacheli and setting up another
beneficiation plant at Kirandul Complex to produce 4 MTPA Pellet Feed Concentrate along
with a slurry pipeline from Kirandul to Bacheli and from Nagarnar to Vizag and Filtration
25
Report No. 20 of 2012-13
Plant at Visakhapatnam. Phase III consists of addition of 2 MTPA beneficiation plant at
Kirandul. Further, RINL was keen to increase its off-take of iron ore in view of its capacity
expansion from 3 MTPA to 6 MTPA and an MoU was signed with RINL in May 2012 to
explore and firm up the finer details.
3.12 The reply only states the contents of TEFR but not the reasons for delay in
establishment of a new pipeline.
Doubling of line between Kirandul and Jagdalpur
3.13 The iron ore is transported by rail between Kirandul and Visakhapatnam.
The distance between Kirandul and Visakhapatnam is 472 KM. This is mostly single line
except at some intermediary stations where loop lines are provided. Doubling of line
between Kirandul and Jagdalpur (distance 150 KM out of 472 KM) would reduce the
turnaround time and thus would help increase evacuation capacity by three MTPA.
3.14 The Company accorded (December 2010) in principle approval to bear the actual cost
which would be provided as interest free advance to Railways and forwarded (December
2010) a draft MoU for processing at the Railway Board level. The cost at 2010 prices was
estimated at ` 850 crore. Negotiations are being held for signing of MoU (March 2012). The
Company has not spent any amount so far (March 2012).
3.15 Thus, the matter is pending with Railways since December 2010. In the interim, the
Company addressed to the Railway Board in April 2011 for early clearance.
3.16 In reply (July 2012) the Ministry stated that discussions were in progress with
Railway Head Quarters in Delhi on the terms of MoU before signing the same. Further,
Ministry has also taken up the matter at the level of Chairman, Railway Board and a letter
has been sent in June 2012 from Secretary (Steel) to Chairman, Railway Board for giving due
priority to the project of NMDC for doubling of KK line.
Recommendation # 3
3.1
The Board should regularly monitor the progress of laying of a slurry pipeline.
3.2
The issues relating to doubling of K-K line should be taken up at the Railway
Ministry level and pursued so as to expedite its completion.
26
Export LTA,
L
11%
Dom
mestic Spot
S
Sales,
3%
Domestic L
LTA, 84%
Ex
xport Spot
Saales, 2%
Report No. 20 of 2012-13
Pricing mechanism
4.2
During 2005-12, the Company sold 95 per cent iron ore through LTA with the
customers and the balance 5 per cent in the spot market. Japanese Steel Mills (JSM) negotiate
iron ore prices with the major producers of Brazil and Australia. The Company’s export
prices were fixed in line with these benchmark prices.
4.3
So far as domestic LTA prices are concerned, the Company followed the Ganeshan
Committee’s12 recommendations containing the methodology for fixation of domestic prices
including mid-term revision for all the products, i.e., Lump, Calibrated Lump and Fines.
4.4
The salient features of the recommendations of the Committee are:
There would be two categories of customers: (a) long term customers and (b) spot
customers.
The prices for the first year in the domestic market be fixed based on Net Sales
Realization (NSR) from exports and thereafter, the base prices of iron ore for the
domestic market be fixed effective from 1 April of every year based upon the
percentage of increase / decrease accepted over the previous year’s price by Japanese
Steel Mills (JSM) for the ore supplied by the Company (suitably adjusted to dollar –
rupee parity).
The seller would reserve the right to review the prices on mid-term basis in
unprecedented upward price (25 per cent and above) in the market scenario.
For spot market and other customers, the Company may adopt competitive bidding/ eauction.
Audit findings
Domestic LTA sales
4.5
Audit analyzed the following issues relating to domestic LTA sales:
Price fixation during five years from 2005-06 to 2009-10 following Ganeshan
Committee report;
Price fixation during 2010-11; and
Price fixation during 2011-12.
Price fixation in domestic market during 2005-10
4.6
The Company entered into long term contracts in August 2005 based on the
recommendations of Ganeshan Committee for supplies to customers effective for a period of
12
Ganeshan Committee was formed in March 2005 by Ministry of Steel to recommend a practicable formula to
link price of domestic iron ore with prevailing international prices. The Committee gave its recommendations in
April 2005 which were accepted by the Ministry in July 2005.
28
Report No. 20 of 2012-13
five years from 2005-06 and valid up to 2009-10 except in respect of one contract for supply
of fines to ESSAR which is valid up to 2015.
4.7
The prices fixed for 2005-06 and subsequent years were based on the principle
recommended by the Committee that net sales realization from exports to Japan be adopted as
the basic price in the first instance, i.e., year 2005-06. The table below shows how the
domestic prices were fixed on the basis of the prices offered by Japanese Steel Mills.
Table 10: Table indicating the basis for arriving at price as of 1 April 2005
Sr.
Particulars
13
1
Price in US$/DLT
given by JSMs
for Fe 65% as
2
Price in US$/ WMT14 for Fe 65%
15
BL*
BF*
DR CLO*
DL*
DF*
50.44
39.13
50.44
48.74
39.13
48.25
36.64
48.25
46.79
35.84
1.19
-0.56
4.76
0
-0.55
3
Bonus/ Penalty
4
Price in US$/WMT including Sl. No. 3
49.44
36.08
53.01
46.79
35.29
5
Net FOB per WMT in `
(1 US$= ` 44.16)
2183
1593
2341
2066
1558
6
Less: Expenses (Freight, Port Charges,
Royalty and Export Duty) in `
674
666
674
643
635
7
Net Sales Realization (` per WMT)
1509
927
1667
1423
923
925
16
1450
925
8
Domestic Price (` per WMT)
1510
2000
* - BL: Baila Lump; BF: Baila Fines; DR CLO: Direct Reduction Calibrated Lump Ore; DL: Doni
Lump;
DF: Doni Fines.
4.8
The prices for the subsequent years were fixed considering the percentage increase
negotiated with JSM on the initial price as above. The prices were also suitably adjusted for
dollar-rupee parity.
Infirmities in the contracts pertaining to domestic LTA
4.9
In the international LTA, the prices were determined once a year and remained firm
for the year. The Ganeshan Committee however recommended that for domestic LTA sales,
the seller (the Company) should reserve the right to review the prices on mid-term basis in
unprecedented upward price (25 per cent and above) in the market scenario. Accordingly, the
Company in its domestic LTA provided, vide clause 4(B)(e), that seller reserved the right to
review the prices on mid-term basis in an unprecedented variation in price of 25 per cent
and above in the market scenario. The clause led to ambiguity as:
13
14
15
16
DLT refers to Dry Long Ton. All export agreements are entered into in terms of DLT only. One DLT is
1.016 Dry Metric Ton.
WMT refers to Wet Metric Ton. Price per WMT = {Price per DLT * (100 - moisture percent) /100}. All
domestic supplies are made in WMT.
For Baila Fines and Doni Fines, the bonus was shown as negative as the domestic supply of Fines contains
only 64.5 Fe whereas the international contracts provide the minimum Fe content of 65 percent.
DR CLO contains higher Fe of 67 percent. Therefore, it commands premium. Hence, higher price was
fixed.
29
Report No. 20 of 2012-13
The term ‘mid-term’ was not defined in the contract and thus, the issue as to when
the price revision would be effected lacked clarity. The Company revised the
prices only once during each year ; and
The LTA also did not specify as to by what percentage the price should be
increased in the event of unprecedented upward variation of 25 per cent and above
in price.
4.10 Due to lack of clarity in the contract, the Company revised the prices by less
percentage than the actual percentage increase in the spot market. The Company also did not
revise the prices as and when the prices went up in the market. As a result of this the
Company suffered a loss of revenue of ` 1,173.68 crore in 2007-08 and 2009-10 offset by a
modest gain of ` 427.74 crore in 2008-09.
Price revision during FY 2007-08
4.11 The average monthly price in the spot market in August 2007 increased by 33 per
cent over the base price of April 2007. The spot prices further increased by 62 per cent over
the base price in September 2007. By December 2007, the prices were 95 per cent higher
than the base price. However, the Company revised the prices only from October 2007 and
that too by 47.517 per cent only. Though the Management approached (February 2008) the
Board for increase in prices, the Board did not agree for the price increase on the ground that
frequent revision of prices may not be compatible with the concept of LTA.
4.12 The total loss of revenue suffered by the company during 2007-08 amounted to
976.17 crore.
Price revision during FY 2008-09
4.13 Contrasting the position in 2007-08, in 2008-09 the international prices had decreased
by 32 per cent in October 2008 and 43 per cent in November 2008 over the base price
of April 2008. The Company reduced (December 2008) its domestic LTA price by a flat
25 per cent (over April 2008 rate) with effect from 1 December 2008. Even after a reduction
in prices by 25 per cent, the domestic price18 of ore (BF: ` 1519/ tonne) still remained
substantially lower than the price19 (BF: ` 3413/ tonne) charged to overseas LTA
customers.
17
18
19
30
Average price increase for the months August 2007 (33 per cent) and September 2007 (62 per cent) came to
47.50%. This 47.50% was applied to the long term base price of BF/ DF to arrive at the quantum of
increase
( 574/ tonne). This increase ( 574/ tonne) was added to the long term base price of all products to arrive
at the revised price.
Price includes Royalty charged at the rate of 19 per tonne.
Net FOB price in / WMT considering 1 US$ = 40.08.
Report No. 20 of 2012-13
Price revision during FY 2009-10
4.14 During the year 2009-10, the prices
of iron ore fines in the spot market increased
As per LTA, NMDC reserved the right to
by 28 per cent by December 2009 over the
review the prices on mid-term basis in an
base price of April 2009. Despite this, the
unprecedented variation in price of 25 per
Company revised the prices by 16 per cent
cent and above in the market scenario. The
LTA were silent about the specific
only with effect from 1 January 2010.
methodology for revision in prices relating
Consequently, the Company suffered a loss
to when to effect the price revision and by
of revenue including bonus of ` 197.51
how much. We noticed revision of prices
crore20 on the total quantity of 6.11 MT of
on the lower side by NMDC leading to a
iron ore sold from January 2010 to March
loss of revenue of 1173.68 crore during
2007-08 & 2009-10 and gain of 427.74
2010. The Management approached (January
crore during 2008-09.
2010) the Board for increase in prices by
` 270 per tonne (16 per cent only) on the
plea that the market may not be able to
absorb the full increase and the Board agreed for the same.
4.15 Though NMDC has not increased its prices fully on the ground that the market may
not be able to absorb full increase, the fact is that, the Company has no control over prices
charged by the steel producers to the end users as indicated below.
Table 11: Table indicating the prices charged for steel (Delhi market) during 2009-10
(` per tonne)
Sr.
1.
2.
3.
Item
TMT 12 mm
HR Coils 2.50 mm
GP Sheets 0.63 mm
April 2009
33,041
33,608
39,328
January 2010
33,620
34,270
44,480
March 2010
34,200
34,660
44,270
Source: Joint Plant Committee, Ministry of Steel
4.16 The Ministry’s reply to the above observations of Audit on pricing during 2005-10
and Audit contentions are given below:
20
The loss has been worked out considering the increase in spot prices by 26% (average of percentage
variation in spot prices from July 2009 to December 2009).
31
Report No. 20 of 2012-13
Table 12: Table indicating the Ministry reply and remarks of Audit
Gist of Ministry reply
Remarks of Audit
Ganeshan Committee mentioned about
‘mutual discussion’ to arrive at price in
falling market and had left applicability
of this clause on the wisdom of NMDC
Board to take care of cyclical nature of
iron and steel industry and totality of
circumstances.
The
Board
was
consciously and specifically vested with
the power to judiciously invoke and
implement the ‘mid-term review’
provision as warranted by the prevailing
market condition in totality. The
quantum and periodicity of applicability
of ‘mid-term’ price revision was left to
the wisdom of NMDC Board by the
Ganeshan Committee.
Ganeshan Committee regarded that the phenomenon of
25 per cent upward variation above the base price at the
beginning of the year unprecedented and stated that this
may happen due to volatility in spot market and/ or
abnormal fluctuation in dollar rupee conversion rate.
The intention of the Committee behind ‘mid-term’
revision was to ensure revision in prices in the event of
unprecedented increase. It was up to the Company and
its Board to ensure that there was no ambiguity in the
terms and conditions of the contract and the terms
should be so clear as to enable the Board to revise the
prices immediately and by the percentage by which the
spot prices have increased. But no such clarity was
ensured. The issue here is about the clarity of terms and
conditions in the contract.
Incorporating sacrosanct and rigid
provisions with respect to frequent
periodical revision in prices to long term
customers based on spot market
vacillations would have deterred the
customers from entering into long term
agreement with NMDC as the advantage
of predictability in prices would have
been lost.
The Ganeshan Committee wanted to ensure revision in
prices only in the event of unprecedented increase of 25
per cent and above. This provision cannot be termed as
sacrosanct or rigid as it provides enormous protection to
the buyers. Rather this provision, in a good measure,
acts in favor of customers who are not required to pay
higher price up to 24.99 per cent increase in spot price.
‘Mid-term review’ as the phrase
connotes, would ordinarily mean in
commercial parlance to review after six
months after commencement of the
financial year in a yearly calendar and
could be invoked only once thereafter.
The contention of the Ministry should be considered in
the light of the fact that the term ‘mid-term’ in the
broader sense means between the two points and allows
price revision during the currency of LTA for the year,
should there be an unprecedented increase or decrease
in price in the market. Even this provision allows price
stability up to a change of 24.99 per cent. Interpreting
“mid term” as once a year has deprived the Company of
substantial revenue in these years.
The customers could have resorted to The reply supports the audit contention that the terms
legal recourse as there were differing and conditions were ambiguous (and hence the
legal opinions by advocates of repute on differing legal opinions).
this provision.
As ordinarily meant and also concurred
by Additional Solicitor General of India,
‘mid-term’ price revision necessitated
revision of long term domestic prices
after 30 September 2007, i.e., from 1
October 2007.
32
It is not that the Company has consistently revised the
prices on 01 October every year. Prices have been
revised on different dates in different years. Further, the
Solicitor General had further stated that he was “of the
opinion that the LTA does not restrict the number of
times a mid term review can be carried out.”
Report No. 20 of 2012-13
Based on the spot price variation
witnessed in iron ore fines prices till
September 2007 on umetal website,
NMDC effected mid-term price revision
by an absolute amount of 574/ tonne
with effect from 1 October 2007 for fines
ore as well as lump ore even though
there was no transparent and reliable
indicator to indicate whether there was
any variation in iron ore lump prices.
The contention of the Ministry that the price revision
was by an absolute amount of ` 574/ tonne and not 47.5
per cent is incorrect. As per the recommendations of
Committee of Directors (CoD) comprising Director
(Production), Director (Finance) and Director
(Commercial), price revision with effect from 1
October 2007 would be based on average variation of
August (33%) and September 2007 (62%). This average
price variation (47.50%) was applied to the long term
base price of BF/ DF (` 1209/ tonne) and rounded off to
the nearest rupee to arrive at ` 574/ tonne. This
quantum of increase in Rupee (` 574/ tonne) was added
to the long term base price as on 1 April 2007 of all the
products to arrive at revised long term base price.
Further, the Ministry’s contention that there was no
transparent indicator to know whether there was any
variation in iron ore lump prices is not convincing. The
Company is in the business of selling iron ore for
decades and it knows that if the prices of fines go up,
the prices of lump ore (which generally have higher Fe
content) would also go up.
Besides, NMDC’s action of mid-term
revision with effect from 1 October 2007
was highlighted as the cause for
increasing of the steel prices by major
steel producers during a meeting with
Secretary (Steel) in February 2008. Any
further increase of iron ore prices with
effect from 1 January 2008 might have
had an inflationary effect on steel prices
besides defeating the essence of LTA and
likely legal complication.
The Company increased the iron ore prices by 47.50
per cent with effect from October 2007 and declined to
increase the prices with effect from January 2008 on the
pretext that the increase will have an inflationary effect
on steel prices. However, it can be seen from below that
the increase in iron ore prices in October 2007 had an
impact of increasing input cost by only ` 1,062 per
tonne of steel produced in March 2008, whereas, the
prices of steel increased by ` 10,350 per tonne of steel
in March 2008 when compared to October 2007 prices.
Table indicating the prices charged for Rebars (12 mm) by RINL
during 2007-08
Product ( / tonne)
April
2007
October
2007
March
2008
Iron ore price charged by
NMDC (BF)
1,209
1,783
1,783
Cost of iron ore consumed per
tonne of saleable steel produced
(1.85 tonnes)
2,237
3,299
3,299
Increase over April prices
1,062
1,062
Rebars 12 mm
30,900
41,250
Increase over October prices
10,350
Source: Price Circulars, RINL
Thus, the cost of iron ore as a percentage of sale price
of steel was about 10 per cent or less and hence the
increase in price of saleable steel attributed to increase
in iron ore price is not fully justified.
33
Report No. 20 of 2012-13
By application of the power vested in the
NMDC Board, the mid-term review
provision could fetch an additional
revenue of about
950 crore to the
coffers of NMDC during the years 200708 & 2009-10.
Increasing the iron ore prices by a
higher amount in FY 2009-10 would
have adversely impacted the lifting of
iron ore by customers and thereby
NMDC’s sales also would have reduced
drastically.
There were domestic indicators, viz.,
OMC lump prices, lump and fine price
variation
as
reported
by
www.steelprices-india.com
in
the
domestic market, which were showing
less than 25 per cent variation in market
scenario.
Monthly variation in iron ore (Lump)
prices in domestic market in case of
Gandhamardan Lump of Orissa Mining
Corporation showed reduction in prices
by 2.3% in December 2009 when
compared to April 2009 prices.
Though the Board exercised its powers and the
Company generated additional revenue, if it had
exercised the revisions fully and timely, the Company
could have generated further additional revenue of
` 745.94 crore during 2007-10.
NMDC had signed LTA with the domestic customers
according to which, each customer was liable to take a
minimum off-take of the product agreed as per the
contract (Clause 2). As per Clause 20 of the contract, on
failure of the customer to lift less than 90 per cent of
the quantities agreed, the buyer ceases to be a long term
customer. The buyers, thus, would have lifted the ore
particularly when it still would have come very cheap
even after 26 per cent increase (BF: ` 2130/ tonne
including royalty) as compared to the price (BF:
` 2891/ tonne at exchange rate of ` 50.53 per US$)
charged to overseas customers during 2009-10.
As per the domestic LTA, the price fixation for
2006-07 and beyond was based on base price plus
increase/ decrease in export price and price adjustment
for JSM on FOB basis for the relevant year. Hence,
until the completion of domestic LTA, i.e., up to 200910, the price fixation was based on export LTA prices.
As the initial prices were based on the net realization
from JSM prices which resulted in keeping the prices
for domestic buyers lower than that of the overseas
buyers, the international spot prices should have been
the basis.
As per the recommendations of CoD of NMDC, the
prices of lump ore in both Barbil and Gandhamardan
Sector of Orissa Mining Corporation had increased by
10% in the month of December 2009 compared to their
respective prices of April 2009 and that of fines
increased by about 24-36%.
Price fixation during FY 2010-11
4.17 The currency of the domestic LTA ended on 31 March 2010 and hence was due for
renewal by 1 April 2010. However, the overseas LTA were valid up to 2010-11. Therefore,
for 2010-11, the Company fixed prices on the basis of increase/ decrease given by JSM. In
the meantime, globally pricing structure for iron ore had undergone change to quarterly
pricing from April 2010. The Company also decided (June 2010) to revise the pricing
mechanism from annual pricing to quarterly pricing.
34
Report No. 20 of 2012-13
4.18 The pricing mechanism followed for fixation of price as of 1 April 2010 is indicated
below:
Table 13: Table indicating the price fixation as of 1 April 2010
Sr.
Item
1. Price in US$/ DLT for Fe 65%
2. Moisture content in % (Wt. avg. of 2009-10 for Export
Dispatches)
3. Price in US$/DMT for Fe 65% (Sr. 1/ 1.016)
4. Price in US$/ WMT (Sr. 3 * (100-Sr. 2/ 100)
5. Fe bonus rate (US$/ DLT) for additional Fe
Fe bonus rate (US$/ WMT) for additional/ less Fe
6. Additional/ less Fe%
7. Bonus/Penalty (US$/ WMT) (Sr. 5 * 6)
8. WMT Price (US$/ WMT) (Sr. 4 + 7)
9. Net FOB per WMT in (1US$= 45.22)
10. Less: Expenses (export rail freight, port charges, royalty and
export duty) in `
11. Netback ( per WMT) – Reference Price
12. Less: 5% loyalty bonus on Reference Price
13. Base Price
14. Less: 5% Price Volatility Discount on Base Price in view of
glut in steel market
15. Net Base Price charged for Q1 of 2010-11
BL21
DL23
BF/
DF22
122.80
4.55
134.70
3.21
137.19 120.86
133.32 115.36
6.88 1.8893
6.58
1.77
0.50
-1.00
3.29
-1.77
136.61 113.59
6177.50 5136.54
1988.50 1897.54
132.57
128.31
2.0723
1.97
0
0
128.31
5802.18
2012.18
4189.00 3239.00
209.00 162.00
3980.00 3077.00
199.00 153.00
3790.00
189.00
3601.00
180.00
3781.00 2924.00
3421.00
139.39
2.82
4.19 The Company after reducing the prices using
NMDC passed on undue benefit to
net back method allowed further discount of 5 per
the customers by allowing loyalty
cent by way of loyalty bonus to arrive at the base bonus of 5 per cent and further
price. A further reduction in prices by way of 5 per reduction of 5 per cent from base
cent incentive in view of the glut in the steel market price for market conditions. This
was given to the customers during the first two unwarranted price reduction resulted
quarters of 2010-11. The extension of loyalty bonus in loss of revenue of 600.83 crore to
the Company during 2010-11.
and incentive to LTA customers was unwarranted as
the international prices are based on negotiations
which inherently include all such factors as loyalty and incentives. As such there was no case
for extending the same to domestic customers particularly, when the prices charged to them
were much lower than that charged to overseas customers (Sr. 9 & 11 in Table 13). This
reduction in reference price by 5 per cent throughout the year and further reduction in base
price by another 5 per cent during the first two quarters resulted in passing on benefit to the
customers amounting to ` 600.83 crore during 2010-11.
21
BL: Bailadila Lump
BF/DF: Bailadila Fine/ Doni Fine
23
Doni Fine
22
35
Report No. 20 of 2012-13
4.20 The price fixed in the first quarter of
2010-11 was the base price which was further
adjusted in the subsequent quarters based on the
percentage changes in the JSM prices. The
Board decided (June 2010) to increase the price
by two-thirds of the increase in the international
price if the latter increases by more than five per
cent in the current quarter over the price of
previous quarter. However, in case of decline in
the international price by more than five per cent, the Board decided to decrease the price
fully, instead of two-thirds. Therefore, the disparity remained in 2010-11 as the Company
did not treat increase or decrease in prices on equal footing.
NMDC has switched over to quarterly
pricing with an option to increase price
by two-thirds of the increase in the
international price by more than 5 per
cent but in case of decline exceeding 5
per cent, the price is reduced fully. This
disparity in pricing has caused NMDC a
further loss of
227.34 crore during
2010-11.
4.21 The first quarter price fixation was based on the percentage of increase the Company
obtained from JSM. During second and third quarters, the prices increased by 22.16 and 5.91
per cent respectively over Q1 prices and for fourth quarter, they increased by 7.67 per cent
over the prices of previous quarter. However, the Company effected price increase by two
thirds instead of full increase leading to loss of revenue of ` 227.34 crore on a quantity of
15.30 MT sold in the last three quarters of 2010-11.
4.22 The Ministry’s reply (July 2012) on the above audit observations and the Audit
contentions are mentioned below:
Table 14: Table indicating the Ministry reply and remarks of Audit
Gist of the Ministry reply
Q1 FY 2010-11 net back prices were
derived from JSM export prices of Q1.
NMDC Board, with a philosophy of
100 per cent customer retention,
decided to offer a discount of 5 per cent
to all long term customers for the
entire year.
Besides, considering glut in steel market,
prevailing at that point of time, NMDC
Board decided to offer another tranche of
5 per cent discount (price volatility
discount) on the base price for Q1 and Q2
only which enticed the long term
customers to sign the long term agreement
and ensured continuous revenue stream
for the Company.
36
Remarks of Audit
The LTA price for export to JSMs is fixed after
negotiations between officials of Ministry of Steel,
NMDC, MMTC and JSMs/ POSCO. The negotiated
price is based on the price increase offered to
Australian suppliers of ore. The price in US$/ DLT
for 65% Fe as on 1 April 2011 was already the
negotiated price and can be said to have element of
discount. Hence, in a scenario of low base price and
increased freight/ export duty, allowing a further
discount was not in the financial interest of the
Company.
The net back prices were already substantially lower
than the prices charged to overseas customers due to
high export duty and export rail freight. Thus, price
volatility discount was not justified.
Report No. 20 of 2012-13
In a very volatile market of rising price
trend, it is a general commercial practice
not to pass on entire increase to the
customers as it may impact the sales
volume severely. Whereas in a falling
market, if the prices do not go down with
the prevailing market condition, then there
may be hardly any buyer. With this
philosophy, NMDC decided to increase its
domestic prices by only 2/3rd of JSM
export price increase and to pass on the
entire benefit in case of reduction in
prices.
The prices of domestic LTAs during 2005-09 were
based on the percentage increase effected by the
JSMs. Similarly, even during 2010-11, when the
export prices offered to JSMs were increased by a
certain percentage, the same percentage increase
should have been effected on the price charged to the
domestic LTA.
Audit suggestion to remove the disparity
between upward and downward price
revisions has been noted by the Company
and
the
Company
has
already
implemented a new pricing policy from the
year 2011-12, which does not have any
such provision.
Price fixation during 2011-12
4.23 The overseas LTA expired on 31 March 2011. These were not renewed as of March
2012. Therefore, there was no JSM reference price to form base for determining the domestic
price. The Board decided (May 2011) to fix prices on a quarterly basis on a net-back method
(i.e., notional net realization from export after deducting expenses) taking into account the
international prices as per Platts Index (65% Fe content) as benchmark prices and suitably
adjusting them for dollar-rupee parity. The domestic prices for the first quarter of 2011-12
were arrived at after deducting the export railway freight, port charges, export duty and
royalty as shown in the table below.
Table 15: Table indicating the basis for arriving at price as of 1 April 2011
Sr.
1.
2.
3.
4.
5.
6.
24
Particulars
Price in US$/DLT for Fe 65%
Moisture content in % (Wt. avg. Q1 of 2010-11
for Export Dispatches)
Price in US$/DMT for Fe 65% (Sr. 1/ 1.016)
Price in US$/ WMT (Sr. 3 * (100-Sr. 2/ 100)
Fe bonus rate (US$/ DLT) for additional Fe
Fe bonus rate (US$/ WMT) for additional/ less Fe
Additional/ less Fe%
24
BL
201.32
1.56
BF/ DF
177.37
3.12
DL
195.45
3.19
198.14
195.05
9.93
9.62
0.5
174.57
169.12
2.7288
2.60
-1.0
192.36
186.22
3.0069
2.87
0
DLT price is arrived at by taking the average FOB price in the preceding quarter using Platts Index (65%
Fe).
37
Report No. 20 of 2012-13
7.
8.
9.
10.
11.
12.
13.
Bonus/Penalty (US$/ WMT) (Sr. 5 * 6)
WMT Price (US$/ WMT) (Sr. 4 + 7)
Net FOB per WMT in ` (1US$= ` 44.45*)
Less: Expenses (export rail freight, port charges,
royalty and export duty) in `
Netback (` per WMT)
Domestic price to be fixed based on net back
Domestic Price (` per WMT) fixed for 1st quarter
of 2011-12
4.81
199.86
8883.78
4942.12
-2.60
166.52
7401.81
4537.94
0
186.22
8277.48
4842.42
3941.66
3942
4540
2863.87
2864
2870
3435.06
3436
3960
[after 15%
premium]
[after 15%
premium]
* INR 44.45/ US$ - 60 days forward cover as on 5 April 2011
4.24 The above mentioned price fixation methodology was followed to fix the prices for
the second quarter of 2011-12. In the 3rd quarter, the prices of fines were fixed based on the
similar method followed for 1st and 2nd quarter. However, in case of Lump ore, the premium
was decreased from 15 per cent to 10 per cent citing the prevailing economy and the market
conditions.
4.25 During the fourth quarter, the Company followed the same methodology for fixation
of price of fines based on netback method as was done during the first three quarters of 201112. However, in respect of Lump, the Board approved for finalization of price based on
weighted average prices obtained by Orissa Mining Corporation (OMC) from its four
operating mines.
Issues in price fixation
4.26 The foregoing discussion indicates that the Company’s pricing policies did not
adequately reflect the movement in international prices. The Company followed different
methods for price fixation during this period (2005-2012). The larger issue is how the
Company should fix the price so that its financial interests get protected. There are no issues
so far as export LTA prices are concerned as those prices are based on the international
benchmark prices offered by JSM to suppliers from Brazil and Australia. However, there are
issues in the fixation of domestic prices as discussed below.
4.27 The Company has mainly followed the ‘Net back’ method and ‘Domestic price parity’
method (based on the prices obtained by OMC) to fix the prices of domestic iron ore at
different points of time. It has not explored the e-auction route on a large scale25 to sell its
ore.
4.28 Under the ‘Net back’ method, the domestic price is fixed after reducing expenses such
as export railway freight, port charges, royalty and export duty from the international price
(LTA or Spot). This price, however, suppresses the domestic price due to high export related
expenses as shown below.
25
38
Between October 2011 and March 2012, 20 e-auctions were conducted and 2.79 MT (1.84 MT from
Donimalai mine and 0.95 MT from Kumaraswamy mine) was sold.
Report No. 20 of 2012-13
Table 16: Table below indicates the percentage of
domestic price vis-à-vis export price for Baila Fines
BF Prices ( /
WMT)
Export FOB price
Less: Expenses
Net Back Price
% of Export FOB
price to Net Back
price
Price charged to
domestic buyers
(incl. royalty)
April’ 09
April’ 10
3,413
2,891
1,209*
58
1,970*
58
1,666*
58
5,137
1898
3,239
63
7,402
4538
2,870
39
1228
1989
1833
3216
3157
April’ 05
April’ 06
April’ 07
April’ 08
1,593
666
927
58
1,908
2,070
1,114*
58
946
1133
April’ 11
* - The price indicated is actual price charged for the year.
4.29 It can be seen from above that the ‘Net back’ price as a percentage of Export FOB
price has declined considerably in 2011-12 mainly due to deductions of increased export
railway freight and export duty which are Country specific. As a result, the domestic buyers
are paying much less for iron ore than that paid by overseas buyers as shown above.
4.30 While the domestic buyers pay less price for iron ore than the overseas buyers, this
does not necessarily get translated into price advantage to the customers as shown below.
Table 17: Table below indicating the price difference between
overseas prices and domestic prices of Hot Rolled Coils
( / Tonne)
Overseas price of HR
Coils
Domestic price of HR
Coils 2 mm
April – December 2005
20,351
April 2011
38,046
March 2012
28,444
43,020
47,630
35,348
4.31 Thus, the ‘net back’ method does not protect the financial interests of the Company,
mainly due to high export related expenses. This method, in a good measure, is akin to
extending a concession (in the form of lower iron ore prices than the international prices) to
the domestic buyers. On being pointed out that NMDC could consider e-auction method for
sale of iron ore, the Ministry narrated the following factors which would render e-auction
method unsuitable.
Iron ore, being a bulk commodity, cannot be stored in large quantities. E-auction results in
delays in evacuation. This would reduce the output and the Company cannot have
economies of scale.
Steel companies need assured supply of ore.
Risk of likely cartelization in the long run.
39
Report No. 20 of 2012-13
4.32 Wherever the price of end-product gets regulated by a regulator on the basis of input
costs, the fixation of a low price for inputs helps in keeping the price of end-product low for
the consumers. As the steel prices are determined by the demand and supply forces of market
and are not regulated by a regulator, keeping the prices of iron ore low only results in steel
producers making additional profit at the cost of iron ore suppliers. In such a scenario, it is
desirable that the market driven price is charged while ensuring assured supply to customers
and predictability of price.
4.33 It is, therefore, recommended that, in view of the present scenario where the steel
product prices are market determined, the iron ore domestic price fixation mechanism may be
established which would address the following issues:
(i)
Optimum price realization for NMDC’s ore;
(ii)
Assured supply to domestic steel producers; and
(iii) Predictability of price.
Spot sales
4.34 The spot sales accounted for 5 per cent of total sales of the Company during 2005-12.
The Company laid down spot market sales policy in December 2007. Spot sales are carried
out through e-auction. The salient features of spot sales policy of the Company are:
i.
The Committee of Directors (CoD) would decide the quantities for spot sales.
ii.
The Company would adopt e-auction / competitive bidding for disposal of quantities.
iii.
Reserve price shall be fixed based on the prevailing market trends before
commencement of e-auction.
iv.
Spot sales should be resorted to periodically after ascertaining the quantity for spot
sales. The quantity for spot sales is the surplus quantity after meeting the commitments
made to long term customers.
4.35 We observed that the spot sales were being conducted as per the laid down procedures
and there were no material issues.
Recommendation # 4
The domestic price fixation mechanism for iron ore may be established which would
address the following issues:
Optimum price realization for NMDC’s ore;
Assured supply to domestic steel producers; and
Predictability of price.
40
Report No. 20 of 2012-13
Chapter – 5
Governance Issues
This chapter deals with the issues relating to governance by the Board of Directors and the
oversight by the Administrative Ministry.
Governance by the Board of Directors
5.1
The Board of Directors is responsible for good governance in the Company and
providing stewardship and direction and, therefore, it is imperative that the Board monitors
the key areas of operations and directs suitable remedial action wherever the operations are
not progressing as intended. The effectiveness of the Board lies in the Management actually
implementing the remedial action directed by
the Board.
The Board of Directors is responsible for
5.2
As discussed in the earlier chapters, our
analysis revealed:
delays in the two Capacity Expansion
projects (Deposit 11B and Kumaraswamy
project);
inadequate Evacuation
Bailadila sector; and
Capacity
at
infirmities in fixation of prices for sale of
ore.
good governance in the company and is
expected to monitor key areas of
operations and take remedial actions if
the operations are found not to progress
as intended.
***
There were delays in implementation of
two capacity expansion projects. NMDC
was also saddled with inadequate
evacuation capacity at Bailadila sector.
There were issues relating to price
revision as well.
***
Although the NMDC’s Board held 63
meetings between April 2005 and March
2012, we noticed that the Board did not
adequately monitor certain high risk areas
of operations.
5.3 Although a total of 63 Board Meetings
were held between April 2005 and March
2012, audit review of the Board Meetings
revealed that the Board did not adequately
monitor the progress of the projects and did not
provide guidance to safeguard Company’s interests in the domestic LTA as discussed below:
Although the Board discussed in several meetings, the award of works for appointment
of consultants for project Deposit 11B and Kumaraswamy project and the additional
capital outlay for these projects, the progress of implementation of these projects was
not discussed by the Board. Later in March 2010, as per the directions (January 2010)
of the Ministry of Steel, the Board constituted a sub-committee of Directors to monitor
the progress of expansion schemes.
Seven meetings of the sub-committee of the Board have been held since April 2010 till
March 2012 to review the progress of various projects. The sub-committee has been
insisting on the expeditious completion of project activities and analysis of delays in
implementation. The minutes of the committee are being put up to the Board. While the
overall effectiveness of such reviews will be known in due course, it is felt that for each
project, the sub-committee minutes should invariably indicate the work planned to be
41
Report No. 20 of 2012-13
completed, actually completed, reasons for delay, if any and the proposed work to be
completed after the meeting date with specific milestones and timeframes.
The issue of inadequate evacuation facility at Bailadila sector was discussed in the
Board Meeting held in July 2008 wherein, in-principle approval was given for laying of
slurry pipeline from Bailadila to Visakhapatnam at an estimated cost of ` 2,500 crore.
However, work for preparation of Techno Economic Feasibility Report (TEFR) was
awarded to MECON only in June 2010 after a period of nearly two years. The Board
failed to take feedback on the progress of the project.
The Ganeshan Committee recommendations which proposed revision in prices on midterm basis were approved by the Board in July 2005 and the same recommendations
were included in the Domestic LTA signed in August 2005. The Board, however, did
not provide any guidance regarding clarity of terms relating to revision in prices, i.e.,
when exactly to effect the revision in prices and by how much. There remained
ambiguity in terms of LTA which resulted in the Company suffering loss of revenue.
Oversight by the Administrative Ministry
5.4
The Company enters into MOU with the administrative ministry (Ministry of Steel)
every year. As per the achievements, the performance of the Company was ranked as
“Excellent”. However, the observations of Audit on the MoU targets are given below.
Table 18: Table indicating the MoU parameters relating to project implementation during
the last three years ended March 2012
Year
Parameter (Target - Weightage)
Remarks of Audit
2009-10
11B – Completion of sub-station work
(31.12.2009 - 2)
11B – Starting of trial run of Package-1
(31.01.2010 - 1)
11B – Starting of trial run of Package-2
(31.01.2010 - 1)
KIOM – Award of works for Package-1
(30.09.2009 - 1)
No weightage was given to the
projects viz., doubling of KK line
between Kirandul and Jagdapur and
laying of pipeline from Kirandul to
Vizag, which were proposed to be
taken up for increasing the evacuation
capacity.
2010-11
KIOM – Placement of order for Package-3
(31.12.2010 - 1)
Preparation of TEFR for beneficiation,
transportation of fines/ slimes from
Bailadila to Vizag through pipeline and
pellet plant at Jagdalpur
(31.01.2011 - 1)
KIOM – Completion of design and
engineering for the Crushing Plant Package
(30.11.2011 - 1)
Even though the 11B project, with
envisaged production capacity of 7
MTPA, was delayed beyond
scheduled
completion,
no
weightage was given for this
project during 2010-11 and 201112.
No weightage was given to
projects facilitating evacuation
during 2011-12.
2011-12
42
Report No. 20 of 2012-13
5.5
The Ministry in its Results Framework Document (RFD) for 2010-11 and 2011-12 set
the following parameters in relation to execution of projects under implementation.
Table 19: Table indicating the parameters in the RFD relating to execution of projects
Year
Parameter (Target - Weightage)
Remarks of Audit
2010-11
KIOM – Ensuring placement for Package-3
(31.01.2011 – 4)
Preparation of TEFR for beneficiation,
transportation of fines/ slimes from
Bailadila to Vizag through pipeline and
pellet plant at Jagdalpur
(31.01.2011 – 2)
The RFD is silent about 11B Project
taken up at Bailadila Sector for
creation of additional production
capacity of 7 MTPA. As regards
Kumaraswamy project, though there
are five other packages (Packages 1,
2, 4, 5 and 6), which were not
awarded till March 2010, no target
date was set in the RFD.
2011-12
11B
–
Starting
trial
production
(31.01.2012 – 2)
KIOM – Completion of design and
engineering for Crushing Plant package
In respect of Kumaraswamy Project,
though there were three packages
(Package 4, 5 and 6) which were not
awarded till March 2011, no target
date was set in the RFD.
KIOM – Kumaraswamy Iron Ore Mine.
5.6
We are of the view that the Ministry needs to set targets for all important activities/
projects of the Company.
Response of the Ministry
5.7
In reply the Ministry stated (July 2012) that the Board of Directors of the Company
meets frequently and takes stock of the progress of various projects mainly during evaluation
of the Quarterly results of the Company and intensive discussions take place. The Budget
Estimates and Revised Budget Estimates of capital expenditure envisaged during the current
and next financial year are also discussed comprehensively, against actual achievements.
5.8
MOU evaluation also contains progress reports on capital expenditure programmes
which is reviewed by functional directors & put up for information of Board. In addition, a
Board sub committee has been constituted to monitor project implementation exclusively. The
sub-committee includes two independent directors.
5.9
The monitoring activities stated by the Ministry are routine actions, and the specific
review of the projects was started by the Board sub-committee only in April 2010. The
review of Board meetings minutes for 2005-06 to 2011-12 shows inadequate and ineffective
monitoring by the Company’s Board as explained above.
5.10
The Ministry in its reply (July 2012) also stated that:
Due care is taken to include the projects of NMDC in the MoU in order of their
priority. However, it may be appreciated that it may not be always possible to include
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Report No. 20 of 2012-13
all the packages/ sub packages of a project in the MoU with NMDC in view of the
limited weightage assigned to this parameter as per DPE guidelines.
Only those targets which are considered important milestones in the annual action
plans of the Company are included in the RFD of the Ministry.
5.11 The reply is not convincing in view of the following:
As per DPEs guidelines, static/ financial parameters are fixed and are given a weightage
of 50. Dynamic parameters, Sector specific parameters and Enterprise specific
parameters have a combined weighatge of 50. Hence, the Ministry can very well ensure
that projects get higher weighatge and the targets are realistic. Development of Deposit
11B, which has a capacity to enhance production by 7 MTPA was not at all given any
weighatge in the MoUs for 2010-11 and 2011-12.
NMDC is a major CPSE in the Ministry of Steel, next to SAIL and RINL. The
parameters included in the RFD against NMDC should be important in view of its
growth and financial achievement. Package 3 of KIOM was included as a parameter for
2010-11 instead of Package 1/ 2. Package 3 relating to electrical works is a non critical
package. Similarly, in the year 2011-12, design and engineering for Package I of KIOM
was given a weightage and the target was set as January 2012. The fact is that Package I
of KIOM was awarded in August 2010 and was scheduled for completion by May
2012. When compared to the scheduled completion, the target set for just design and
engineering for the Package seems to be too soft.
5.12 The governance by the Board and the oversight by the Administrative Ministry
needs to improve.
Recommendation # 5
The Board of Directors of the company need to review the progress of ongoing projects
periodically and suggest remedial action wherever warranted so that the projects are
completed as envisaged.
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Report No. 20 of 2012-13
Chapter – 6
Conclusion and Recommendations
Conclusion
6.1
The Company operates in business of iron ore mining with limited number of major
players where the operating margins and profits are high. The Company has been performing
well on this front as it clocked a profit before tax of 10,760 crore on an income of 13,278
crore in 2011-12.
6.2
Based on the audit objectives set by us, we have observed the following:
The Company’s production capacity was in line with the target set in the Corporate
Plan. The capacity utilization was 85 per cent or higher between 2005-09 and 2011-12.
It declined below 80 per cent in 2009-10 and 2010-11 due to damage to the evacuation
pipeline of ESSAR Steels Limited and also due to delays in implementation of
evacuation capacity expansion projects.
Anticipating the increase in demand, the Company decided to develop Kumaraswamy
Deposit and 11B Deposit in the year 1997 and 2003 respectively. These two projects
were still under implementation in March 2012. The delay in project implementation of
Kumaraswamy Deposit was mainly due to delays in getting statutory clearances and
Deposit 11B mainly due to external constraints. Delays were also noticed during
implementation of packages which were due to deficiencies in project management. The
project costs have gone up significantly.
Production capacity needs to be supported by adequate transport facilities to evacuate
production from mines to the buyers’ sites. The evacuation facilities were inadequate in
Bailadila sector. The alternatives available to increase the evacuation capacity were
not pursued swiftly by the Company.
The Company entered into long term agreements with JSM for supply of iron ore. The
prices negotiated by the Company were in line with those paid by JSM to Australian
and Brazilian suppliers. The export prices of the Company formed the basis for fixing
domestic prices. However, due to non revision of domestic prices by the Company in
line with the movement of market price, the Company suffered a revenue loss of
745.94 crore during 2007-10.
By extending unwarranted reduction in price, the Company passed on benefit of
600.83 crore to the customers during 2010-11. Further, not increasing the prices by
full percentage in line with increase in export prices led to loss of 227.40 crore
during the same period.
During 2011-12, the Company followed ‘Net Back’ method and ‘Domestic Price Parity’
method to fix the prices of iron ore. The net back method suppresses the price and the
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Report No. 20 of 2012-13
domestic price parity method which is based on OMC prices is an imperfect method of
fixing prices as the ex-mine prices vary based on the quality of ore and transport
distance. Considering that the end-product (steel) prices are market driven, it is
desirable that NMDC follows a mechanism which fetches it optimum price while
providing assured supplies and predictable prices to customers.
The Board of Directors is expected to monitor the key areas of operations and take
remedial actions if the operations are found not to progress as intended. There were
delays in implementation of two capacity expansion projects. Although the Board held
63 meetings during 2005-12, it did not adequately monitor the progress of key projects
which were not progressing well. Subsequently, the Board formed a sub-committee in
March 2010 to review the progress of various projects. In respect of price revision in
case of domestic LTA, the Board did not provide any guidance regarding clarity in
terms relating to revision of prices, i.e., when exactly to effect the revision in prices and
by how much.
The oversight by the Ministry was deficient to the extent that it did not set appropriate
targets in RFD for the projects under implementation.
Recommendations
6.3
We make the following recommendations for improvement:
The Company needs to formulate a strategy spelling out its plans for acquisition of
new mines/ reserves;
The Company needs to enhance its project management capability by focusing on
project planning, implementation and monitoring. In this regard, the Company needs
to specify the timeframes and milestones for all project activities and ensure their
strict adherence through continuous monitoring and requisite remedial action;
The Board should regularly monitor the progress of laying of slurry pipeline;
The issues relating to doubling of K-K line should be taken up at the Railway
Ministry level and pursued so as to expedite its completion;
The domestic price fixation mechanism for iron ore may be established which would
address the following issues:
Optimum price realization for NMDC’s ore;
Assured supply to domestic steel producers; &
Predictability of price.
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Report No. 20 of 2012-13
The Board of Directors of the Company need to review the progress of ongoing
projects periodically and suggest remedial action wherever warranted so that the
projects are completed as envisaged.
New Delhi
Dated:
(A K PATNAIK)
Deputy Comptroller and Auditor General
and Chairman, Audit Board
Countersigned
New Delhi
Dated:
(VINOD RAI)
Comptroller and Auditor General of India
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